For most of its history, oil has flowed in one direction: from developing nations, where it is produced, to industrialized nations, where it is consumed. That pattern no longer holds true, and the shift could produce another economic force weighing on global oil prices.
Oil prices have plunged since mid-2014 amid global oversupply, with U.S. prices falling $1.75, or 5.9%, to $27.94 a barrel Tuesday on the New York Mercantile Exchange.
Emerging markets have accounted for the majority of global oil consumption since 2014, according to the International Energy Agency. Demand from developing countries amounted to slightly more than half of the 95 million barrels a day consumed in the fourth quarter of 2015.
The shift marks a reversal after decades when the U.S. and other developed nations in the Organization for Economic Cooperation and Development dominated demand.
With producing nations in the Middle East, Latin America and elsewhere responsible for a bigger part of the consumption pie, lower oil prices could spark a vicious circle in which demand falls along with prices as the value of those countries’ exports declines, weighing on economic growth.
“The emerging markets are largely commodity-based markets,” said Richard Soultanian, co-president of energy-consulting firm NUS Consulting Group. “With the enormous stress they’re undergoing as a result of the broader commodity slump…it’s hard to find any pockets of significant demand.”
The main concern has been weaker economic growth in China, which is responsible for much of the oil demand in emerging markets. But other oil consumers in the emerging world also are pulling back amid sluggish global growth. In the Mideast, some countries have cut gasoline subsidies as revenue from oil exports dwindles, which could curtail consumer demand there.
Economies in Brazil and Russia, both oil exporters, shrank in 2015, and their oil consumption fell as well. Unexpectedly sluggish growth in emerging-market economies would be a major obstacle to oil prices rebounding, analysts say.
“Demand concerns are everywhere,” said Harish Sundaresh, portfolio manager at Loomis, Sayles & Co., which manages $229 billion.
As for supply, many analysts forecast the oil glut that sent prices sliding in mid-2014 could ease by the end of 2016. Output in the U.S. and other regions is expected to slow this year, allowing bloated inventories to start shrinking.
But many analysts say demand growth this year is difficult to predict. If consumption comes in lower than expected due to weak economic growth, particularly in emerging markets, any oil-price recovery could be pushed to 2017 or later, they say.
“The race is between decelerating supply and decelerating demand,” said Bill Herbert, analyst at Simmons & Co. International. “Everybody is 95% focused on supply.…But we’ve got demand slowing as well.”
Simmons recently cut its global oil-demand growth forecast for 2016 to 800,000 barrels a day, which would represent a 0.8% growth rate. That is below widely watched forecasters IEA and the U.S. Energy Information Administration, which expect demand to grow 1.2 million and 1.4 million barrels a day, respectively.
Trading house Vitol expects demand growth between 800,000 and one million barrels a day this year, said Christopher Bake, a member of the company’s executive committee, at International Petroleum Week in London on Tuesday.
“I don’t think we can rely on low prices driving much incremental demand from this point,” Mr. Bake said. “A lot of…demand destruction has occurred in the commodity-based economies.”
Low oil prices historically have boosted demand as cheaper prices for gasoline and other fuels have encouraged consumers and businesses to spend more.
U.S. oil prices already are down 25% this year, which some analysts say could spur more demand. But demand growth has slowed in recent months, sparking concerns that low prices are no longer encouraging more buying compared with a year ago, when prices already had fallen significantly. Global consumption grew by 800,000 barrels a day in the fourth quarter from the prior year, according to the IEA, a 64% drop in the growth rate from the third quarter.
“At $40 oil [or lower], you are not going to get the right amount of demand. You will get way too much demand,” said Francisco Blanch, head of global commodities research at Bank of America Merrill Lynch.
Part of the fourth-quarter slowdown was due to warm weather in the U.S. and Europe, which limited heating-oil consumption. But the IEA also blamed “weakening macroeconomic conditions in China, Brazil, Russia and other commodity-dependent economies,” according to its January report.
Unlike in developed nations, where cheap gas prices encourage drivers to take road trips or buy larger vehicles, lower oil prices don’t necessarily translate into cheaper fuel costs in emerging economies. The IEA in January said because some subsidies that had lowered what consumers paid in Saudi Arabia and other Middle Eastern countries have been cut, the agency expects oil demand in the region to grow more slowly this year. In other countries, a weakening currency has undercut savings from lower oil prices.
A surge in the developing world’s oil consumption boosted energy prices in recent years. China’s robust growth helped drive a decadelong rise in commodity prices in the early 2000s, and the country still accounts for more than one-tenth of global oil demand.
But some analysts warn that as China moves from a manufacturing to a service-oriented economy, it could consume less oil.
Michelle Stevens, senior portfolio manager at Baird Investment Management, which manages $3.5 billion in assets, eliminated her funds’ exposure to energy companies after China devalued its currency in August, she said.
“As the yuan devalues, the dollar will rise and…commodity prices, especially oil, are going to fall,” she said.
Written by Nicole Friedman of The Wall Street Journal
(Source: The Wall Street Journal)