How Would A Drop In Asian Demand Impact Oil Prices?

While the oversupply of oil and gas in the global markets was considered to be a key reason for the onset of the commodity downturn, the inconsistencies in global demand played an equally crucial role in causing the oil slump. The slowdown in China, one of the fastest growing economies, was the major factor that widened the gap between demand and supply, causing the oil prices to plunge sharply. Over the last three years, there have been various instances of slowed oil demand in China. However, things seem to be stabilizing now, with market experts forecasting the Chinese economy, and in turn, its oil demand to grow strongly over the next few years. In addition to China, India is also one of the major consumers of global oil, and is expected to contribute a notable portion of the global oil demand growth going forward. Thus, these two nations are likely to play a critical role in the recovery of oil prices in the coming years. Below, we present our demand growth forecast for these economies and how a deviation from the same could impact our oil price estimate.

See Our Complete Analysis On Anadarko Petroleum Here

Source: International Energy Outlook 2017, September 2017

China – Largest Driver Of Oil Demand After The US

China, the world’s fast-growing economy, is the second largest consumer of oil after the US. Despite holding 24.6 billion barrels of proved oil reserves, which is the highest in the Asia-Pacific region (excluding Russia), the country has been unable to meet its exponentially growing demand for crude oil. As a result, the country’s oil demand has expanded at an annual rate of roughly 6% over the last 15 years, while its oil production increased at only 2% per year during the same period. Consequently, China has become the largest net importer of oil, surpassing the US and has become a key factor in the determination of oil prices.

That said, China’s strategy to slowly move away from an energy-based economy to a service-based economy is likely to result in a reduction in its energy consumption in the coming years. Further, with the increased awareness about climate change, the country is expected to shift to renewable and environment-friendly sources of energy, which will further bring down its energy demand. Accordingly, International Energy Agency (IEA) forecasts China’s oil demand to grow at only 1.2% annually over the next 25 years, as opposed to the 5% annual growth experienced by the country over the last decade. Yet, the agency expects the country to overtake the US as the largest oil consumer by 2030, and its net imports are likely to reach 13 million barrels per day (bpd) by 2040. This implies while China’s oil demand will continue to grow in the coming years, its share in the global demand growth is likely to be lower compared to the past years.

India – Long Term Driver Of Oil Demand

India, the second most populous country, is the third largest energy consumer in the world, after China and the US. Holding only a small fraction of proved oil reserves, the country has to rely heavily on imports for oil, as its domestic production is not sufficient to meet the country’s oil consumption. However, with slowing energy demand growth in China, India has emerged as a strong contender to drive the global demand in the long term. This is because the country’s per capita energy consumption is currently less than 0.75 tons of oil equivalent (toe) per person, which is significantly lower compared to the world average of close to 2 toe per person.

Further, with the Indian government’s focus on cleaner fuels, sharp anticipated growth in transport demand and air travel, and development of petrochemical projects, its oil demand is expected to rise significantly in the next few years. Thus, according to IEA, India’s demand for oil is expected to expand to 10 million barrels per day by 2040, which is roughly 4% annual growth for the next 25 years. This implies that India would account for almost one-third of global growth by 2040, surpassing China’s demand growth.

Our Take

Given the above factors, we believe that China and India will drive the global demand for oil and consequently, will play a crucial role in the recovery of oil prices in the coming years. According to our base case for Brent oil price forecast, we assume that a portion of Gross Domestic Product (GDP) growth contributes to a country’s oil demand growth. Based on historic data, we have assumed this to be around 35%. Further, we estimate the Chinese and Indian economy to grow at a stable rate of 7% over the next few years.

Now, using these assumptions, we arrive at an average Brent oil price of $65 per barrel for 2018, which will gradually increase to $90 per barrel by 2024 (grey bars). However, in case the Chinese and Indian economies grow at a lower rate, of say 6%, in the next few years, we expect the oil prices to drop to an average of $84 per barrel by 2024 (blue bars). Below, we show how the lower GDP growth rate of both China and India can impact Brent oil prices using our interactive platform. Feel free to create your own scenarios and visualize their impact on oil prices.

View Interactive Institutional Research (Powered by Trefis):

Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap

More Trefis Research