IEA: Strong Demand Growth But Still Too Much Supply

World liquids demand will be huge in 2015 because of low oil prices. That’s the good news.

The bad news is that the demand surge hasn’t really begun yet and over-supply will dominate the market through 2016.

This is what I predicted Monday in my post “When Will Oil Prices Turn Around?” and what I reported yesterday based on the EIA STEO report.

In its August Oil Market Report (OMR), the IEA revised 2nd quarter 2015 demand upward 370,000 bpd from its July estimate but also revised supply upward by 140,000 bpd. Total liquids supply is 96.53 million bpd and demand is 93.5 million bpd (Figure 1).

Chart_2Q13-3Q14_Supply-Demand 12 Aug 2015
Figure 1. IEA quarterly liquids supply and demand. Source:  IEA August 2015 OMR & Labyrinth Consulting Services, Inc.
(click image to enlarge)

The production surplus for the 2nd quarter of 2015 was 3.03 million bpd, 230,000 bpd lower than the agency’s July estimate (Figure 2).

Chart_Prod Surp-Def 12 Aug 2015
Figure 2. World liquids production surplus or deficit. IEA August 2015 OMR & Labyrinth Consulting Services, Inc.
(click image to enlarge)

IEA stated that demand for the rest of 2015 will be “the biggest growth spurt in five years and a dramatic uptick on a demand increase of just 0.7 mb/d in 2014.” Consumption will likely increase 1.6 million bpd. The agency went on to say that supply continues to grow at 2.7 million bpd.

IEA further suggests that the long-anticipated decline in world production will probably be most pronounced in the second half of 2015 and into 2016 “with the US hardest hit.

The message is clear. The world continues to have an over-supply problem that is slowly improving but it will take another year before the market comes into balance.

OPEC continues to hold the cards and could change the balance if it chooses.


  • Oil demand increase: not much from Europe

    Europe oil consumption peaked 2005

  • Art,

    As always, your attention to the details of production and demand data is outstanding, and I’m envious of your skill in this area. But your conclusion seems to ignore exogenous factors that (in my opinion) are nearly certain to change the game before 2016 is over.

    > The message is clear. The world continues to have an over-supply problem that
    > is slowly improving but it will take another year before the market comes into balance.

    I’d put it differently: Unless something (such as OPEC policy) changes, it will take another year before the market comes into balance, but a policy change is more likely to come first.

    Russia and OPEC jointly produce almost half the world’s oil; about 40mmbpd between them. If they we to make an agreement to jointly cut by just 10%, the 2mmbpd oversupply would become a 2mmbpd global shortfall! We’d see prices north of $80 within a week.

    I don’t think KSA will take part in any such move until at least November, after the U.S. shale operators have been terrorized throgh their two big vulnerability points, i.e. fall maintenance and October credit reviews. But after that, it’s hard for me to see KSA keeping this charade going for another year. I’ll be watching the Dec. 4th OPEC meeting (and any hints leading up to it) carefully for signs of changes to quota policy.

    All the berst,

    • Arthur Berman


      I completely agree with your observations.

      Russia along with many OPEC producers are hurting with decreased revenue from low oil prices. Saudi Arabia, UAE and Kuwait are in better shape but would also like higher prices. They also want to see maximum damage on the unconventional competition.

      Credit re-determinations are part of the time line but reserve write-downs are another. So, you may be right about an OPEC cut at their November meeting but they may wait until sometime in early 2016 after Q1 earnings and reserve write downs.

      Thanks for your useful comments


  • Art, I’m a little cautious on the demand growth narrative. Is this all coming from China? There are some blackspots including the whole of Mediterranean Europe and OPEC itself. And is all the good work done to improve vehicle efficiency to be undone? And another 800,000 bpd of Iranian crude hanging over the market.

    But if price is still close to $50 a year from now having visited $20 then supply must get hit hard at some point as companies go under, mergers, project cancellations and general mayhem in the industry.

    And in response to Erik, one of the things that has surprised me is that we have heard little of social unrest throughout OPEC. I saw a TV documentary about the health service in Venezuela that was on its knees. But little else. Its a curious thing that we credit OPEC with maintaining market order and supporting prices but throughout its history it seems to have been more pre-occupied with maintaining market share. I don’t think KSA will give up until there is OECD blood on the carpet.

    But then again, perhaps Russia joins OPEC?


    • Arthur Berman


      Those are interesting thoughts about oil prices going as low as $20 and still being $50 a year from now, and certainly possible. I wonder, though, if Russia/Putin can survive that scenario unless sanctions are lifted (not to mention Venezuela, Nigeria & Angola).

      $50 oil prices a year from now would be catastrophic for many US tight oil companies that are really walking dead men now and could trigger the larger scenario of bond defaults unless M&A resolves those issues.

      I totally agree that the knight-on-white horse of demand is unlikely to make much of an appearance despite the rhetoric in the latest IEA and OPEC monthly reports.



  • Euan,

    > Then again, perhaps Russia joins OPEC

    My speculation is that a key element of KSA’s strategyt is to encourage (read: coerce) Russia to either join OPEC or to otherwise participate in solidarity with OPEC on production quotas. A key aspect of such a deal would be that Russia (and whatever they call the former KGB these days) would become the enforcer to prevent smaller member countries from exceeding their production quotas, which appears to have been a rampant practice in the past.

    I agree that they won’t give up until there’s blood in the streets, but I think that’s what’s coming before Thanksgiving, UNLESS U.S. production declines dramatically first thanks to the drilling cuts from 6 months ago finally being felt.

    Another interesting observation is that it’s now clear to me that OPEC “Spare capacity” is the myth I’ve speculated for years that it might be. It’s crystal clear that KSA is pumping every barrel they possibly can to wage this campaign. There is no OPEC spare capacity. What you see right now is what they’ve got.



    Eric, OPEC spare is most definitely real, but the size is questionable. The IEA adjust the spare capacity in a highly methodical way. But all countries bar Iran and KSA are now pumping flat out. No doubt that Iran has some spare. But yes a question mark over that 2 Mbpd KSA spare. I believe it exists as sour heavy crude that does not have a refining market and so in practice is theoretical.

    Several OPEC countries are in fact experiencing production issues that will worsen in the years ahead with low price. Pumping flat out, their production is falling. OPEC should really reorganise with KSA, UAE, Kuwait and Iraq ± Iran ± Qatar ± Russia – the big boys and the rich boys. Leave the rest to pump as hard as they can.

  • Hi Art,

    Yes, I didn’t mean to imply “Expect a cut in November”. My view is “No freaking way they’re going to cut BEFORE November”, for reasons cited. But when after that it happens will depend on a whole bunch of factors we have no visibility to. KSA met with Russia in Moscow yesterday. Who knows what they’re planning…

    On OPEC spare capacity, ok, I guess I buy the possibility of heavy sour “capacity” that they are claiming because it looks good on paper. But I stand by my contention that KSA is already peddaling as fast as they possibly can right NOW in terms of producing as much useful, marketable oil as they possibly can. If they have anything at all beyond what they are already pumping, then I contend something is “wrong with it”. Heavy sour would certainly explain that.


  • Art,

    I guess that’s the bogey man I was poking. That defaults in oil cos triggers a broader weakening of demand. Algeria top of my list of OPEC countries to worry about. E

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