India is the New China
Crude oil prices closed at the highest level all year as concerns about supply and demand continue to simmer. Not only do we have continuing attacks on Nigerian oil infrastructure and a breakdown of the Venezuelan socialist system, we also have record breaking demand. Demand that has died subpar global economic growth and demand that could explode it the global economy gets any momentum. The one place that demand should be noted is not in China, even though it’s near a record high, but in India.
Back at the bottom of oil back in 1998 and 1999, it was hard for many to imagine that oil demand growth, in a significant fashion, could be achieved. It was thought that because the world’s largest energy consumer, the United States, had matured, demand growth might be tepid. Oh sure there was China, but many experts downplayed that by saying the Chinese economy was so backward it would take decades for that country to achieve sustained oil demand growth. Of course a few short years later Chinese demand growth started to flourish, driving energy prices to all-time record highs. Think of India as the new China.
India crude oil demand will be the story of the decade. While the Indian economy has failed to live up to some people’s expectations and has had some false starts, it seems that their demand growth trajectory is just getting started. So much so that the Energy Information Administration (EIA) thought that India’s oil demand warranted a special mention in their new “Short-Term Energy Outlook” that was released yesterday. The EIA said, “Oil consumption in India is expected to increase by 350,000 barrels per day this year, the country’s largest annual volume growth ever, based on EIA data that goes back to 1980.” This harkens back to the last major cycle bottom in 1998-1999 where in just a few short years, China went from being an oil exporter to one of the most ravenous consumers on the earth. India and Viet Nam may now be that demand growth driver at a time when major oil companies have cut spending by billions of dollars and that’s causing the loss of billions of barrels in future oil production.
The EIA also is saying that U.S. oil production will continue to fall. The EIA says,
“Low oil prices continue to cut into domestic oil production, with U.S. monthly oil output not expected to start steadily increasing until the end of 2017. The decline in U.S. May oil production is expected to be the largest drop in monthly output since Hurricane Ike knocked out a big chunk of offshore oil production in September 2008.”
And while that bodes well for higher prices, the IEA sees global oil inventories continuing to rise to mid-2017, which could help moderate oil prices during that period. I guess that is assuming that OPEC can keep raising production and we don't see a total collapse of Venezuela and Nigerian output.
The good news for consumers is that the IEA still says that, “Even with higher crude oil prices passed on to consumers at the pump, summer retail gasoline prices are still expected to be the lowest in 12 years. The good news for oil bulls is that the IEA says, “Despite the recent rise in gasoline prices, summer gasoline demand is forecast to reach a record 9.5 million barrels per day.”
The IEA says that, “U.S. natural gas production is forecast to remain mostly flat through the summer before output picks up at the end of this year and into 2017 in response to an expected rise in natural gas prices.” Yet that may be an optimistic assessment as natural gas rigs continue to be near a record low. If we get a hot summer, look out for the underpriced natural gas.
We will see oil rigs come back but because of the historic cuts in capital spending with other projects, it might not be enough to fill the void from large projects and major disruptions in Nigeria and in Venezuela which may turn out to be more long term than transitional.
Today oil traders will look to the EIA weekly status report. The America Petroleum Institute reported that crude inventories fell by a more than expected 3.57million barrels. But gasoline rose unexpectedly by 760,000 barrels and distillates by 270,000. The rise in products may raise some domestic demand concerns. Let us see if the EIA agrees.