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BP's view of world energy markets hints at where oil prices are likley headed

BP's view of world energy markets hints at where oil prices are likley headed

UK-major BP released their annual review of world energy demand and supply this week. The report reveals some interesting trends in global energy consumption, which might provide some insight into where oil prices might be headed.

World energy consumption is growing at a rate of just 1%, down from the 10-year average of 1.8%.

Energy consumption in China grew just 1.3% last year, the lowest since 1997-98 but still the largest growth market globally. The decline was blamed on continued weakness of the country's industrial sector (a big energy consumer), particularly iron, steel and cement.

Brent averaged less than US$44 a barrel last year, the lowest since 2004 (in nominal dollars).

 

WORLD OIL PRICE (COURTESY BP)

 

Here are some other interesting statistics from the review:

CRUDE OIL

Oil still accounts for one-third of the world's energy supply. After declining from 1999 to 2014, market share has increased since 2015. World oil consumption is still growing by 1.6 million bbl/day (1.6%), led by 400,000 bbl/day growth in China and 330,000 bbl/day in India. That's still higher than the 10-year average of 1.2%. 

World oil production grew just 400,000 bbl/day last year, the slowest since 2013. Production out of the Middle East increased by 1.7 million bbl/day (led by Iran, Iraq and Saudi Arabia). Production outside of the Middle East declined 1.4 million bbl/day, led by the US, China and Nigeria.

 

WORLD OIL SUPPLY & DEMAND (COURTESY BP)

NATURAL GAS

Growth in global natural gas consumption slowed to 1.5% last year, far below the 10-year average of 2.3%. The EU saw a 7.1% jump while consumption in Russia declined sharply. 

World natural gas production increased just 0.3%, led by Australia and Iran. Global production grew just 0.3%, the slowest in 34 years. Production declined sharply in the US (for the first time in almost a decade), offsetting big gains from Australia.

The US is expected to return to growth this year as it works towards becoming a significant LNG exporter.

 

NATURAL GAS TRADE: PIPELINE VS LNG (COURTESY BP)

COAL

The use of coal declined for the second year in a row, falling 1.7% in 2016. Declines were led by the US and China, two of the world's largest coal consumers. 

Coal's share of primary energy use fell to 28.1%, the lowest since 2004. World coal production declined 6.2%, the largest on record, also led by lower output from China and the US.

 

WORLD ENERGY USAGE BY TYPE (COURTESY BP)

It remains to be seen whether President Trump's "love" of coal will be enough to revive production and use of coal-fired power in the US.

CARBON EMISSIONS

After 10 years of strong growth, world carbon emissions have flatlined. Some of those declines came from the US, but much was likely attributed to less industrial activity in China. CO₂ emission from energy sources grew just 0.1% last year, the lowest since 1981-83.

 

GLOBAL CARBON EMISSIONS (COURTESY BP)

However, BP warns that a pick-up in global activity, particularly in China, will likely cause a resumption of the trend towards higher emissions.

SO WHAT DOES THAT TELL US ABOUT WHERE OIL PRICES ARE HEADED?

Demand from emerging markets (particularly China) is not as strong as economists would suggest, which helps explain sluggish demand for all commodities. Given the size of the Chinese market, commodity prices will likely not rebound until the Chinese economy recovers from whatever is ailing it.

The world consumed 1% more energy in 2016, despite an advertised GDP growth rate of 3.4%. That means either energy intensity is falling rapidly, or perhaps more of the world's economy is shifting towards services. Either way, GDP growth is no longer a great forecaster of energy demand growth.

For oil markets, 2016 saw feeble production growth (400,000 bbl/day) but strong demand growth (1.6 million bbl/day), which may have helped rebalance markets and put a floor underneath crude prices.

After bottoming at US$32/bbl in January of 2016, Brent has averaged closer to US$54 a barrel so far this year. Data out of China and India also suggests that demand for oil remains relatively strong despite weak growth in overall energy demand. However, it is unclear how much of that demand was driven by low oil prices or stockpiling of crude.

The bad news is that oil supply is set to increase considerably this year and stubbornly high global crude stockpiles would suggest all that extra oil isn't being consumed fast enough. And that will likely keep a lid on oil prices, at least in the short term.

Repairs progressing at Mildred Lake but return to normal delayed to mid-July

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