The International Energy Agency (IEA) has predicted that global oil demand will grow at a rate of 1.2 million barrels per day in 2017, largely unchanged from 2016 and down from 2015’s five-year high of 1.79 million bpd.
The IEA said that record global debt levels poses a clear risk to oil demand, citing figures from the International Monetary Fund (IMF) that showed the world is awash with a record $152 trillion in debt.
Years of low interest rates have encouraged sovereigns, corporates and individuals alike to load up on debt, which the IMF estimates is equivalent to 225 per cent of total global economic activity.
Financial markets have generally shown that investors anticipate a long period of low inflation and low interest rates.
However, the 45 per cent rise in the price of oil this year means energy is no longer the “overwhelmingly deflationary” influence it was as recently as a year ago, the IEA said.
“If one believes futures prices, oil could continue to act as an inflationary pressure. Assuming the majority of other global price pressures remain deflationary, the current low inflation/low interest rate environment will most likely remain,” the IEA said in a monthly oil market report.
“If other costs start to reflect the potential oil-price upside, or at least lack of downside, then the status quo could rapidly change making incumbent debt levels a hugely restrictive expense,” the agency said.
In its Fiscal Monitor published on October 5, the IMF had said while debt profiles can vary from one country to another, the sheer size of the debt could set the stage for an unprecedented private deleveraging that could thwart a fragile economic recovery.
“Hence, achieving the IMF’s central 3.4 per cent 2017 global economic growth forecast — that underpins the demand forecasts carried in this report — will not be clear sailing,” the IEA said.
The IEA also said global oil supply could fall in line with demand more quickly if the Organisation of Petroleum Exporting Countries (OPEC) and Russia agree to a steep enough cut in production.
The agency however said it was unclear how rapidly this might happen.
OPEC, led by Saudi Arabia, agreed last month to cut production to around 32.5 to 33 million barrels per day (bpd) and Russia has signalled it is ready to join in any effort to temper supply and shrink a stubborn global surplus of unwanted crude.
Oversupply helped send oil prices from $115 a barrel in June 2014 to as low as $27 in January this year. Crude has since recovered to around $50 on expectations of a production cut.
The IEA said in its August report it expected world oil demand to grow at a rate of 1.2 million bpd next year, keeping its forecast unchanged from last month, but cut its estimate of growth in 2016 by 40,000 bpd to around 1.2 million bpd, from around 1.3 million bpd last month.
“Even with tentative signs that bulging inventories are starting to decline, our supply-demand outlook suggests that the market — if left to its own devices — may remain in oversupply through the first half of next year,” the IEA said. “If OPEC sticks to its new target, the market’s rebalancing could come faster.”
“At this stage, it is difficult to assess how the OPEC supply cut, if enforced, will affect market balances,” the agency added.
“A significant rebound in production from Libya and Nigeria and further growth from Iran would suggest that bigger cuts would have to be made by others, such as Saudi Arabia, to meet the production target.”
Meanwhile, Iran is recovering market share after years of Western sanctions, while in Libya, civil unrest has cut production and a series of attacks on oil infrastructure have curtailed Nigerian supply.
All three are expected to be exempt from any coordinated cuts, meaning that the onus will likely rest on some of the higher-producing members, such as Saudi Arabia and Iraq.
The IEA forecast a decline of 900,000 bpd in non-OPEC output in 2016 to 56.6 million bpd, and expects a rise of 400,000 bpd in 2017.
Russian oil corporation rejects OPEC cap
A new twist that may scuttle OPEC’s oil freeze strategy has emerged following rejection of oil cut by Russia’s energy giant Rosneft.
Igor Sechin, Russia’s most influential oil executive and the head of state-controlled energy giant Rosneft, said his company will not cap oil production as part of a possible agreement with OPEC.
His comments underline how difficult it is for Russia to get its oil companies to freeze or cut output as part of a potential deal with OPEC, designed to support oil prices.
President Vladimir Putin told an energy congress on Monday that Russia was ready to join a proposed OPEC cap but did not provide the details.
“Why should we do it?” Sechin, known for his anti-OPEC position, told Reuters in Istanbul on Monday evening, when asked if Rosneft, which accounts for 40 per cent of Russia’s crude oil output, might cap its production.
Earlier on Monday, Sechin told reporters that Rosneft planned this year to raise its oil production, already the world’s largest among listed producers, above the 203 million tonnes (4.1 million barrels per day) it produced in 2015.
Sechin said he doubted some OPEC countries, such as Iran, Saudi Arabia and Venezuela, would cut their output either:
“Try to answer this question yourself: would Iran, Saudi Arabia or Venezuela cut their production?” he said.
Russia’s oil industry has argued for years that it cannot cut output to support falling global prices for purely technical reasons linked to the climate in Siberia; in reality it can – as long as it has the political will.
Putin could in theory force companies to cut their production or postpone the launch of new oilfields.
Russia was already pumping at the post-Soviet record high of 11.1 million barrels per day in September thanks to a recovery in oil prices which triggered exploration drilling activity.
Sechin has long argued that any oil price increase as a result of joint actions by OPEC and non-OPEC members will allow the United States to resume production growth from high-cost shale deposits.
“The Americans want it most ($50 per barrel) as the shale oil projects become profitable with such a price. And $60 (per barrel) will result in more shale oil projects,” Sechin told Reuters.