Oil traders focused on China’s crude demand may be overlooking a less conspicuous problem elsewhere.
That is according to
analysts, who argue that the real risk for oil demand is Germany, after nine straight months of declines. From March to November 2018, German oil demand fell every month compared with the previous year, in data from the Joint Organisations Data Initiative.
Standard Chartered estimates that German oil demand fell 181,000 barrels a day, or 7.4% year over year, in 2018, and will decline further in 2019 and 2020. Meanwhile, the International Energy Agency expects China’s demand growth to hold steady at 470,000 barrels a day in 2019, though Standard Chartered expects growth to slow slightly.
“Traders have been worrying far too much about one thing,” said Paul Horsnell, head of commodities research at Standard Chartered. “Everybody was watching China and expecting the big swings to come from there. The places to watch were really the U.S. and Germany.”
Global oil demand started 2018 off strong and helped propel oil prices to multiyear highs. However, the crude market reversed those gains after economic-growth concerns surfaced in the second half of last year. A continuing trade battle between the U.S. and China has also led to worries of slowing demand from the world’s two largest consumers of oil.
Those factors helped drive oil prices to their lowest level in over a year, dipping as low as $42 a barrel in late December. Since then, prices have rebounded on production cuts from major exporters and a stabilizing economic outlook. On Monday, U.S. oil futures closed down 0.6% at $52.41. Brent, the global benchmark, declined 1% to $61.51.
U.S. demand led growth from developed nations in 2018, Standard Chartered said, but the bank expects U.S. demand growth to slow from 504,000 barrels a day last year to 224,000 barrels a day in 2019, and 78,000 barrels a day in 2020.
Faltering demand in Germany has preceded weak industrial data, which raised fears of a continued slowdown in Europe’s largest economy. Industrial production dropped for the fourth straight month in December, and Germany’s economy contracted in the third quarter of 2018 for the first time since 2015.
Standard Chartered analysts warn that the weakness could spread to other parts of Europe, further undermining demand for oil.
German demand makes up a minor fraction of the world’s oil consumption; the country was the 10th largest oil consumer in 2016, accounting for 2% of the global total, according to the U.S. Energy Information Administration. Since China made up 13% of oil consumption as of 2016, a drop in Chinese demand growth would likely have a comparatively larger impact.
Additionally, signs of slowing demand in other parts of Europe haven’t materialized, Mr. Horsnell noted.
“It doesn’t suggest a broader contagion just on the back of this [data],” he said. “It’s primarily confined to Germany at this stage.”
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