OPEC Raises 2017 Oil Demand Growth Forecast as U.S. Shale Production Expected to Jump Again in March

Tuesday February 14, 2017

Although Monday saw market declines of crude in response to U.S. shale builds and Organization of the Petroleum Exporting Countries (OPEC) non-member compliance of the cartel's production cutback agreement at only 48 percent, OPEC is attempting to assuage fears that the global glut is as bad as ever by pointing to better than expected worldiwde oil demand.

In its monthly report released Monday, OPEC revised its forecast for oil demand in 2017 to a growth of 1.2 million barrels per day (bpd), up slightly from an earlier estimate and "well above" the 1 million bpd averages of the past decade.

OPEC in its report added that demand could outdo the 10-year average in 2017, with the new road transportation infrastructure and the expanding petrochemical sectors in the U.S. and China being the driving factors (the cartel cites expected increases in vehicle sales in the U.S., Europe, China, and India to support its predictions).

However, OPEC's 2017 forecast is down from the 1.3 million bpd estimated for 2016; and while the International Energy Agency last week echoed the cartel by upping its global demand forecast slightly to 1.4 million bpd, that figure too was down from the 1.6 million bpd the IEA predicted for 2016.

OPEC's good news spin and plaudits for member compliance notwithstanding, The IEA's latest drilling productivity report forecasts that U.S. shale production in seven major regions will rise by 80,000 bpd to 4.87 million bpd in March – nearly double the 41,000 bpd climb the agency expected for February in its last report.

This, combined with Algeria, Iraq, and Venezuela pumping above their allotments in defiance of the OPEC agreement, has caused observers such as Alex Holburn, oil and gas analyst for Hannam & Partners, to worry that future production from Nigeria and Libya - which were exempt from the agreement - could significantly change the cooperative dynamics among the cutback participants who are reducing output more than called for.

It's also difficult to buy completely into OPEC's argument that rising demand will help bring about market balance in lieu of 100 percent compliance, when the economies of so many nations seem to be in flux, case in point: India, whose fuel consumption for January fell the most since 2003, by 4.5 percent to 15.5 million tons compared to 16.2 million tons a year ago, according to the Oil Ministry's Petroleum Planning and Analysis Cell.

Tushar Tarun Bansal, director at Ivy Global Energy, said, "This decline in demand is due to demonetization; I would expect this decline to be a one off and dissipate from February, [and] this should result in a slower demand growth for diesel in the first quarter in 2017."

Last week, Boris Schlossberg, managing director of foreign exchange strategy for BK Asset, told CNBC that oil is in "a very dangerous zone" and that "the irony of this whole thing is that OPEC cuts are holding, but the demand is not there.

"And if it trips to $50 a barrel stops, I think it could really tumble very quickly; so I think we're in a perilous territory."