Don’t Fall for the Snake Oil on Crude Demand
If there’s one narrative that’s been rehashed endlessly in the media, it’s that demand for oil is weakening. Falling demand in China is frequently cited as a harbinger of weakening global demand in the future. This argument was used as a basis for predictions of $20/bbl oil, or of permanently lower oil prices. It is demonstrably wrong, but there are two reasons why people fall for it, in my view.
I’ve previously written about one of these, the misconception that a slowing of demand growth amounts to a fall in demand.
Indeed, demand growth is projected to slow this year, after an above-average increase in 2015. The International Energy Agency expects demand growth to slow to 1.2 million barrels per day (bpd), well behind 2015’s blistering growth of 1.8 million bpd (which isn’t yet reflected in the following graphic):
If crude oil demand grows 1.2 million bpd this year as projected instead of 1.8 million bpd as it did last year, then we will still need more oil than we used last year. Demand will still be strengthening rather than weakening, even as the rate of that strengthening slows.
Demand growth of 1.2 million bpd would still exceed the average annual growth rate of 1 million bpd over the last 30 years. That’s a very different scenario from an outright year-over-year decline in demand, which has happened only twice in 30-plus years.
That leads to the second point, which is that very short-term fluctuations in demand are often misinterpreted as long-term phenomena. This is perfectly illustrated by this recent graphic of Chinese crude oil imports:
Source: Business Insider
If you pay attention to the monthly ups and downs in the data it can be easy to confuse random variation with a trend. In the graphic above, we see a pretty consistent trend in annual demand growth of Chinese crude oil imports. But if we were trying to interpret real-time data in the summer and fall of 2015, we might be fooled into thinking demand was declining.
Indeed, the monthly import totals did decline, and stayed down for four months. But then they spiked to the highest levels ever, and suddenly the rolling 12-month average looked like it has for much of the past decade.
So, when you hear someone mention “weakening demand” as a bearish factor for oil, just remember that they have likely misinterpreted the evidence.