Geopolitical influences to impact oil outlook

30 Jun 2016

Despite some forecasts of a global slowdown in demand for oil, a rising global middle class will drive continued increases in demand, say Macquarie analysts.

Macquarie expects that demand for oil will increase by 1.35 million barrels a day in 2016, compared with market consensus of growth between 1 million and 1.2 million barrels a day.

"Our bullish outlook on demand stems from our analysis of current global demographics, and a positive correlation between growth in income and consumption of gasoline," says Macquarie Securities Head of Oil and Gas Research Vikas Dwivedi.

Dwivedi says countries start to consume more gasoline when they reach a per capita GDP of approximately $US6,000.

"There are now more people entering that middle class range globally than ever before," he says.

Middle class travel demands driving growth

The non-OECD nations of India and China are critical drivers for future growth.

Macquarie estimates India will increase its consumption of oil by 330,000 barrels a day in 2016, up from 220,000 barrels a day in 2015, and China by 380,000 barrels a day.  

In the first quarter of 2016 India posted its strongest ever oil demand growth and now has the fastest demand growth in the world. This growth was primarily driven by transport fuels, a result of rising demand for cars from the growing middle class.

Our bullish outlook on demand stems from our analysis of current global demographics, and a positive correlation between growth in income and consumption of gasoline.

India’s diesel consumption rose by 7.5 per cent in the 2015-16 financial year, which ended March 31, and gasoline consumption rose by 14.5 per cent.

Oil product demand in China has also been strong due to expansionary government policies and transport fuel demand. China's Civil Aviation Administration recently reported an 11.6 per cent rise year-on-year in passenger numbers.

Supply: growth ambitions of Saudi Arabia and Iran

At its meeting on 2 June 2016, the Organization of the Petroleum Exporting Countries (OPEC) failed to reach an agreement on a new global oil supply ceiling.

Until December 2015, OPEC had an oil production ceiling of 30 million barrels a day, which was often exceeded. With oil prices up approximately 80 per cent from recent 13-year lows, there was little pressure to curb supply.

Dwivedi also attributes the failure to reach an agreement to the rising demand in India and China, as well as the competing long-term production growth ambitions between Saudi Arabia and Iran.

"Holding approximately 70 years worth of oil in reserve, we are increasingly confident in Saudi Arabia’s long-term ambitions to grow their production levels and take global market share," says Dwivedi.

Analysts expect a clearer picture for Saudi Arabia by September, after the traditional summer peak.

Price forecast: USD fluctuations disguise the fundamentals

Dwivedi says much of the recent rally in oil prices can be traced to the bullish macro trade with the US dollar, which has now run its course.

In the near term, he expects the oil price to range from $US40 - $US45.

"As the US dollar rises, the price of oil drops," he says.

"Oil has become a proxy for global macro trading sentiment. Day to day price movements are currently driven by the US dollar, however eventually the price of oil will be a result of trading on its own fundamentals."

For a full copy of the report, 'Global crude oil and natural gas', please contact your Macquarie representative.

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