Insatiable Asian appetite has slashed oil surplus, says PIRA's Ross

Robust growth in Asia's appetite for oil amid stagnant supplies has  accelerated a reduction in surplus that the market was battling with, but an expected recovery in prices next year might cut demand from price sensitive consumers, according to Gary N. Ross, Executive Chairman and Head of Global Oil at PIRA Energy Group, an analytics unit of S&P Global Platts.

While China would continue to see a demand growth of 500,000 b/d next year, India's demand growth of about 350,000 b/d was sending a strong signal to the market that growth was backed by solid fundamentals and is here to stay.

"The strong demand growth is a reflection of low prices, which has really encouraged demand in China and India," Ross said.

On the back of strong Asian growth and virtually no addition to supplies, Ross expected 2016 to end with global demand growth of about 1.9 million b/d. But he expects that to slow down to about 1.6 million b/d in 2017, as some consumption may be dented because of an expected rise in prices.

"Our view is that oil prices will go up in 2017 and with higher prices we will see an increase in investment," Ross said, adding that even though investments had fallen over the past couple of years, companies were getting more "bang for their buck" as project costs had also come down.

"The key factor has been the very strong demand growth that we have had this year, combined with really zero supply growth. And what that has done is eliminate the surplus, the flow surplus, that we had in 2015,  and turned it into a flow deficit," he added.

This had led to a scenario in which the second and third quarters of this year have seen a surplus drawdown of about 700,000 b/d. "So already supply is growing less than demand through the second and third quarters by 700,000 b/d."

POCKETS OF GROWTH

Ross said since China's domestic production of crude was down by about 400,000 b/d, it is increasingly dependent on overseas markets to meet its oil needs. In addition, Beijing's ambitions to sharply boost strategic storage for their energy security would also keep their demand at very high levels.

"To my mind, it really doesn’t matter whether China's GDP grows by 7% or 6% or even 5%. Their demand will still grow by at least 400,000 b/d," Ross said.

He added that China's decision to allow independent refiners to import crude oil is opening up new avenues for demand growth in the country.

"The independent refiners are running a lot more crude and producing more products and they are also looking to export more products," he said. "But  they are also looking to import more blend streams to make the products. We so expect a big growth in imports of mixed aromatics and light cycle oil into China."

China's apparent oil demand rose nearly 1% in September from a month ago to 10.85 million b/d, on the back of stable GDP growth in the third quarter, helping to sustain the  recovery that started in July when petroleum products consumption in Asia's biggest consumer rebounded from 10-month lows.

Commenting on India, Ross said that that India's GDP growth of about 7%-8% at a time when oil prices are low was very supportive for demand.

"The fundamentals in India are really strong, given how low their oil consumption  is relative to their population. They are also building substantial inventories."

India's oil products demand grew 8.5% year on year in 2015 to 177 million mt, or 3.81 million b/d. Over January-August this year, products demand was up 10% at 128.39 million mt, or 4.13 million b/d, according to India's Petroleum Planning and Analysis Cell. The IEA expects India's oil demand to average 4.3 million b/d in 2016.

Commenting on the global oil demand growth outlook, Ross said that an expected  GDP growth of about  3.3% in 2017, from 2.9% this year, would help global diesel demand to bounce back to over 400,000 b/d in 2017, from about 200,000 b/d this year.

"Economic growth will be positive for diesel -- the economies will grow faster next year, the manufacturing sector should be strong and world trade should be strong," he added.

But Ross added that he expects gasoline demand, which is growing at   about 700,000 b/d this year, to rise by less than half of that next year as oil prices are likely to head north.

OPEC HOPES

Ross highlighted the two scenarios that might emerge at the November 30 OPEC meeting.

"There's a binary situation we are facing now. We will have a situation where OPEC cuts production and oil will be at $50-$55 per barrel by the end of the year and we will accelerate the rebalancing in the first half 2017.”

"But if OPEC doesn't cut, and if Saudi Arabia were to go to 11 million b/d, oil prices (from 10.53 million b/d according to Platts’ survey for October), instead of being at $50-$55/b, would be at $35-$40/b. This will push back the rebalancing by another year. "Our best guess is that OPEC will cut. So we will have a relatively constructive outlook."

Separately, commenting on the latest decision by the International Maritime Organization to implement the 0.5% global sulfur cap by 2020 rather than defer it to 2025, Ross would that it create massive hurdles for Asia.

"The industry is going to find it very expensive. It's going to create a situation in which we think Asia will be short of low sulfur molecules. Therefore they will be importing a lot more light sweet Atlantic basin crude. And we think they might even become a net importer of ultra-low-sulfur diesel. Because of this spec change, you are talking about a 3 million b/d of high sulfur fuel oil which has to be replaced. There is just not enough time."