Could gas find enthusiasm be premature?

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“Despite what many investors think, oil demand is relatively resilient, even in the event of an economic slowdown. So, to put into context our forecast for 2019 oil demand, it is important to note that oil demand in 2018 will grow at roughly 1.45 mb/day," says Mark Lacey, head of commodities at Schroders.

“We are conservatively forecasting demand growth of closer to 1.25 mb/day in 2019. This growth comes almost entirely from non-OECD demand, with OECD demand expected to be roughly flat in 2019."

He points out that OPEC and the IEA (after the fall in oil prices) have started to downgrade demand assumptions for 2019, driven by concern for generally weaker global GDP growth. “However, we have not yet seen demand weakness coming through in the reported numbers, with recent data showing record high Chinese refinery demand and a recovery in Indian oil demand to record high imports.

“We do expect emerging market currency weakness to weigh on oil demand a bit, but this negative impact will be more muted now that oil prices are at lower levels,” he says.

The role of China

In his opinion, OPEC and IEA are underestimating demand growth from China. “Our view differs from theirs because we believe Chinese oil demand growth will be driven mainly by vehicle usage trends, as opposed to industrial activity or economic growth. Personal mobility (both in terms of domestic driving and international travel) continues to be something increasingly sought after, and this means the average Chinese person is starting to use more gasoline and kerosene.”

As such, Lacey concludes there is reason to believe that oil will bounce in 2019. “We are forecasting that oil prices recover over the next six to nine months as the full extent of the destocking is felt mid-year. Based on our estimates, we still see incentive pricing for oil at around $75/bl for Brent and we still do not expect to see a pick-up in offshore sanctions until these prices are sustained.”