The strength of oil consumption took analysts by surprise last year, and played a big role in crude’s recovery to a three-year high in January. Demand this year could even turn out to be “way in excess” of 2017’s exuberant levels, Khalid al-Falih, the normally cautious energy minister of Saudi Arabia predicts. Data from industries like aviation, shipping and trucking suggest he might be right.
Oil demand growth hasn’t been this strong in decades: even the gloomiest estimates from three heavyweights of global forecasting – the International Energy Agency in Paris, the US Energy Information Administration, and the Organisation of Petroleum Exporting Countries – show consumption expanding by a minimum of 1.4mn barrels a day every year from 2015 to 2018. For part of that time, Opec and allied producer states have been cutting crude supplies to eradicate a global glut.
“The market has certainly come very far in terms of rebalancing,” said Bassam Fattouh, director of the Oxford Institute for Energy Studies. “Opec and non-Opec have taken much credit for that, but stronger-than-expected demand was a key contributor.”
While a lot of that growth is being driven by consumers in emerging markets taking to the roads for the first time, the strongest run in global trade expansion for several years is also boosting demand as planes, trucks and ships move more goods around the world.
Though it may yet be at risk from the protectionist talk coming from Washington, the International Monetary Fund’s most recent estimates for world trade growth are that it will exceed 4% for three consecutive years through 2019, a feat last achieved when oil prices were surging to all-time records a decade ago.
“Global synchronised economic growth – across developed and emerging markets – is driving a notable uptick in manufacturing and trade, boosting construction and freight movements which look to be behind renewed growth in diesel demand, after several years in the doldrums,” said Eric Lee, an analyst at Citigroup. Here’s a run-through of some additional data points that support the idea of 2018 being a stronger year for oil demand than some expect:
Magic manufacturing: The industry of making stuff hasn’t been this strong in eight years, according to the JPMorgan Global Purchasing Managers Index. Meanwhile, industrial production in China grew last year at the fastest pace since 2014, economist estimates compiled by Bloomberg show.
China’s flying, so is the world: All that economic activity is making Chinese citizens richer and encouraging travel. The country’s airline passenger traffic surged 15% in 2017, the fastest rate of annual growth since 2009. Fuel consumption by commercial airlines globally is set to increase by 5% to the highest level on record, according to the International Air Transport Association. It also estimates air freight surged the most in seven years in 2017 and cargo growth will remain above the trend in 2018.
Full steam ahead: Next look what’s happening at sea. The Baltic Dry Index, a measure of freight costs heavily influenced by China’s unstoppable demand for coal and iron ore, is about 25% higher than where it was a year ago. As well as building the country’s domestic economy, much of those raw materials help Chinese manufacturers to make finished goods for export. At the other end of the country’s maritime supply chain are the ships that take goods to consumers in the US and Europe. Last year, global growth in containerised goods grew at the fastest rate since 2013 – fired by China.
Keeping on trucking: Once all those goodies get shipped across oceans, they still need final delivery by road. The Cass Shipments Index, measuring total freight volume in the US, surged 12.5% year-on-year in January, according to Cass Information Systems. That’s yet another data point confirming that the US economy, still by far the world’s largest, is strong and getting stronger. Here’s how it looks seasonally:
In the US, truck tonnage rates, another indicator of the transport of goods, are at their highest seasonal level in at least 20 years, data from the American Trucking Associations show. Rates surged by almost 8% last year and have declined only once annually since 2013. An increase in vehicle freight indicates more consumption of diesel.
Little wonder there’s some optimism from those who sell oil. Al-Falih, the Saudi Arabian oil minister, said at an event in India in late February that “people are already talking about 2018 demand being way in excess” of the 1.5mn-to-1.6mn barrels a day of 2017 – even if he subsequently cautioned that only time will tell.
At the CERAWeek by IHS Markit conference in Houston this week, Opec Secretary-General Mohammad Barkindo said demand is the strongest it’s been since the financial crisis of 2008 to 2009.
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