JEDDAH — Forecasters estimate that the world economy will grow by between 2.8% and 3.8% this year—about one percentage point lower than last year's consensus forecasts. Yet as monitors of the global economy lower their expectations for 2015, executives are increasingly focusing on opportunities presented by diverging growth rates among regions, countries, and even sectors. Having bottomed out in the second quarter of 2014, global oil demand growth has since steadily risen, with year-on-year gains estimated at around 0.9m barrels per day (mb/d) for the final quarter of last year and 1.0mb/d for the current quarter, the International Energy Agency's (IEA) March Oil Market Report revealed. The IEA's forecast of demand growth for all of 2015 was raised by 75 kb/d to 1.0 mb/d, bringing global demand to an average 93.5 mb/d. Global supply rose by 1.3 mb/d year-on-year to an estimated 94 mb/d in February, led by a 1.4 mb/d gain in non-OPEC output. Declines in the US rig count have yet to dent North American output growth. Final December and preliminary current-quarter data show higher-than-expected US crude supply, raising the 2015 North American outlook. The IEA's view is supported in part by latest estimates of the International Monetary Fund (IMF) in October 2014 which said world GDP growth was measured at 3.3%. For 2016, the IMF and other organizations have lowered previous global GDP growth projections to 3.1% to 4.1%. Most forecasters expect a robust US economy to continue to lead the way, and the eurozone's new program of quantitative easing is a sign the region is ready for expansion. And while falling oil prices weigh heavily on growth prospects for commodities-dependent Brazil and Russia, China and India are benefiting from easing inflationary pressures. According to the IEA, the IMF's view that the global economy will grow by 3.7% this year will help oil demand reach 93.5 mb/d in 2015, an increase of 1% on 2014. The markets did not reach positively or seem to share the IEA's enthusiasm. Following the IEA's statement, Brent futures for April lost 1.82% trading at $56.04 and WTI diving 4% to $45.17. All in all, the oil price has more than halved since June 2014. Nonetheless, the IEA revised upwards its demand growth forecast for 2015 by 75,000 b/d to 1.0 mb/d. This comes after oil demand came in better than expected during 4Q2014 and 1Q2015, which it said was likely a reflection of improving macroeconomic conditions and “one off” factors such as the impact of colder weather in the northern hemisphere and a base effect boost from 2013. The forecast of demand growth for all of 2015 was raised by 75 kb/d to 1.0 mb/d, bringing global demand to an average 93.5 mb/d. OPEC crude output edged down by 90 kb/d in February to 30.22 mb/d. The slightly higher demand forecast has raised the "call" on OPEC crude for the second half of 2015 to 30.3 mb/d, above the group's official 30 mb/d target. Global oil production in February rose in annual terms by 1.3m barrels per day to 94m with an increase of oil production outside OPEC of 1.4m barrels per day, according to energy specialist Platts. Omar Al-Nakib, senior analyst at National Bank of Kuwait, said the fall in OPEC output was its lowest level in two years. “The drop of 330,000 b/d compared to January was primarily a reflection of outages in Libya and Iraq. Libyan output declined further to 341,000 b/d in February as the conflict between the country's two rival governments continued to impact oil fields and installations. Since last October's high of 900,000 b/d, two thirds of the country's oil production has been taken offline,” Al-Nakib noted, adding: “In Iraq, meanwhile, storage constraints at the country's southern tank farms and bad weather in the Shatt Al-Arab saw crude production decline by almost 260,000 b/d to 2.7 mb/d during the month. This is the second month in a row since December that production has fallen. Output had reached a 35-year high of 3.6 mb/d last December.” Saudi Arabian production was also down, by 44,000 b/d to 9.6 mb/d during February. Nevertheless, since OPEC's Saudi-led decision in November to hold off on cutting output below the group's official target level of 30 mb/d, the Kingdom has steadfastly stuck to its strategy of protecting market share and kept its production relatively steady. “While February saw OPEC output exceed the 30 mb/d level for the tenth consecutive month, improving global oil demand this year should help narrow the OPEC supply-demand mismatch to 0.7 mb/d if OPEC maintains production at current levels for the remainder of the year. OPEC would thus need to cut output by 0.7 mb/d to 29.5 mb/d (the “call on OPEC crude and stock change) in order to balance expected demand this year. Often during the second half of 2014, OPEC was producing at least 1.2 mb/d in excess of the call,” he added. North Sea Brent crude oil spot prices decreased by $2/bbl in March to a monthly average of $56/bbl. This decrease followed a $10/bbl increase in February, the first increase in eight months. Several factors put upward pressure on Brent prices in February, including news of falling US crude oil rig counts and announced reductions in capital expenditures by major oil companies. This upward price pressure abated in March, as the combination of robust world crude oil supply growth and weak global demand contributed to an increase in the rate of global inventory builds. Inventory builds are projected to average 1.7m bbl/d through the first half of 2015. Total global oil inventories are estimated to have increased by 2.1mbbl/d in March alone however, compared with a 0.9mbbl/d increase in February. Despite concerns that inventories are rising rapidly, the IEA thinks that inventory builds will moderate during the second half of the year, as demand rises and non-Organization of the Petroleum Exporting Countries (OPEC) supply growth slows, particularly in the United States, because of lower oil prices. No surprise then perhaps that the monthly average WTI crude oil spot price decreased to an average of $48/bbl in March, down $3/bbl from February. WTI prices fell in March in large part because of commercial crude oil inventories in Cushing, Oklahoma, which increased to a record 58.9mbarrels as of March 27th. The record inventory levels have put downward pressure on the price of crude oil for prompt delivery compared with the price of crude oil for delivery in later months. EIA projects the Brent crude oil price will average $59/bbl in 2015, with prices rising from an average of $56/bbl in the second quarter to an average of $67/bbl in the fourth quarter. The Brent crude oil price is projected to average $75/bbl in 2016. However, this price projection remains subject to the uncertainties surrounding the possible lifting of sanctions against Iran and other market events (see analysis box below). WTI prices in 2015 and 2016 are expected to average $7/bbl and $5/bbl, respectively, below Brent. The Brent-WTI spread for 2015 reflects continued large builds in US crude oil inventories. The current values of futures and options contracts continue to suggest a high degree of uncertainty in the price outlook. WTI futures contracts for July 2015 delivery traded during the five-day period ending April 2nd averaged $52/bbl, explains the IEA, while implied volatility averaged 46%, which it said, “(established) the lower and upper limits of the 95% confidence interval for the market's expectations of monthly average WTI prices in June 2015 at $35/bbl and $78/bbl, respectively. The 95% confidence interval for market expectations widens over time, with lower and upper limits of $32/bbl and $97/bbl for prices in December 2015. Last year at this time, WTI for July 2014 delivery averaged $99/bbl, and implied volatility averaged 17%. The corresponding lower and upper limits of the 95% confidence interval were $85/bbl and $115/bbl,” in its April STEO report. Given the high level of uncertainty in oil markets, several factors could cause oil prices to deviate significantly from current projections. Among them is the potential lifting of sanctions against Iran if a comprehensive agreement is reached. The level of unplanned production outages could also vary from forecast levels for a wide range of producers, including OPEC members Libya, Iraq, Nigeria, and Venezuela. The degree to which non-OPEC supply growth is affected by lower oil prices will also affect market balances and prices. Most commentators believe that any lifting of Iran sanctions could substantially change the short term forecast for oil supply, demand, and prices by allowing a significantly increased volume of Iranian oil to enter the market. “If and when sanctions are lifted, the baseline forecast for world crude oil prices in 2016 could be reduced $5-$15/barrel (bbl),” said the IEA. Iran is believed to hold at least 30m barrels in storage, and the EIA believes Iran has the technical capability to ramp up crude oil production by at least 700,000 bbl/day (bbl/d) by the end of 2016. This, in addition to even moderate levels of global inventories, means that global production continues to exceed demand. However, if the new framework agreement between the P5+1 and Iran results in a comprehensive deal and a lifting of sanctions, it could significantly change the short term energy outlook forecast for oil supply, demand, and prices, which still assumes that Iran's production will stay close to the current level through 2016. — SG
