Saudi Gazette report JEDDAH – The summer peak season and a sustained recovery in the US economy plus steady growth in China will push global oil demand consumption growth to 1.1 mbpd in 2014, Jadwa Investment said on Sunday in a new industry report. Global oil demand in Q2 2014 increased by 1 million barrels per day (mbpd) year-on-year, supported by economic uplift in the US, while falls in OPEC production saw global supply limited to increases of 0.4 mbpd, year-on-year, the report noted. The study further said non-OPEC supply will exceed global demand growth in 2014, but this will not translate to lower brent prices, as geopolitical issues in Ukraine, Libya and Iraq keep a floor on prices. As a result, Jadwa revised its brent oil forecasts upwards from $105 per barrel previously, to an average of $109 per barrel in 2014. Jadwa also revised Saudi crude production to 9.7 mbpd for 2014, up from 9.4 mbpd previously. The main factors for the revision include, lower than anticipated output from other OPEC members, faster upturn in the US economy, and continued higher year-on-year domestic Saudi consumption. Saudi Arabian crude production was up by 2 percent in Q2 2014, year-on-year, bringing the first half 2014 production average to 9.7 mbpd, up from 9.3 mbpd over the same period in 2013. We had previously forecast full year 2014 average Saudi production at 9.4 mbpd, but we are now revising this upwards to 9.7 mbpd. A number of factors have led us to revise our production forecast, including continued outages and slower growth in output from other OPEC members, faster than expected upturn in the US economy resulting in higher demand for Saudi crude, and higher year-on-year domestic Saudi consumption. In the previous Jadwa forecast, Saudi Arabia's share of total OPEC production was assumed to gradually fall during the year as output from Libya came back online and Iraqi production steadily rose to around 4 mpbd over the course of 2014. The report also projected rise in demand for Saudi crude coming from an improving US economy. Although shale oil has allowed the US to reduce its imports of crude oil, these reductions have affected producers of mainly lighter crude types, such as Nigeria, but because a majority of US refineries are still configured towards processing heavier crudes, imports from Saudi have not been be adversely affected. In fact, in the first half of 2014 Saudi crude exports to US averaged 1.4 mbpd, up from 1.2 mbpd in same period last year. Furthermore, increased demand for generation in Saudi Arabia electricity during the summer months in Q3 2014 and continuing economic growth throughout the remainder of 2014 will result in Saudi domestic consumption not changing substantially from first half 2014 average consumption of 1.9 mbpd. According to OPEC data, global demand in Q2 2014 increased by 1 mbpd year-on-year with 1.2 mbpd increase from non-OECD countries and a drop of 0.2 mbpd in OECD countries. Rising consumption during the summer months will push demand upwards in Q3 2014, with a pickup in economic activity, primarily in the US, supporting higher consumption during the third and fourth quarters of 2014. Saudi Arabia consumption averaged 1.9 mbpd in the first half of 2014, up 28 percent, year-on-year. This rise was much higher than other GCC countries, which only increased by an average of 1 percent, over the same period. The sharp rise in oil demand from Saudi Arabia is largely a result of the startup of the 0.4 mbpd Satorp refinery in Q4 2013, which has pushed up refinery intake levels since the beginning of the year. Going forward, increased demand for generation in electricity during the summer months will see Saudi Arabian oil consumption rise in Q3 2014 and continuing economic growth will sustain oil demand throughout the remainder of 2014. The US is the main source of demand growth amongst the OECD countries. Further evidence of a full scale recovery in the US economy was provided by higher Q2 2014 manufacturing PMI's, which will contribute to US oil demand rising to an average of 15.6 mbpd in 2014, up 2.1 percent, year-on-year. EU oil demand growth will continue to be weak due to the stuttering economy; Q2 2014 PMI's declined slightly, compared to the previous quarter. Although we expect the EU economy to improve marginally over the second half of the year, as the fiscal position of the southern European economies continues to improve and industrial production recovers, structural changes through continuing improvements in fuel economy standards (Figure 2), will mean growth in oil consumption will be limited for the foreseeable future. Japanese oil demand in Q2 2014 was broadly unchanged year-on-year and will remain flat during the remainder of 2014 due to changes in the energy landscape. Although the Japanese economy has been weighed down by a sales tax, which was introduced at the start of June 2014, a mild recovery is expected on the back of central bank money injections and government spending. More pertinently, the government is also in the process of reactivating 17 out of its 54 nuclear reactors. Five of the 17 are earmarked to come back online in 2014 contributing to oil demand dropping by 3.6 percent in 2014, year-on-year. Also, the Japanese government is forcing domestic crude refiners to improve energy-efficiency through regulation, which will result in refining capacity decreasing by around 0.1 mbpd in 2014. China's economy gained pace in June on the back of improving demand at home. Manufacturing PMI's improved in Q2 2014, with June's PMI rising above the 50 mark for the first time in 2014. However, China's ability to meet its forecasted annual GDP of 7.5 percent is also contingent on the strength of overseas demand, and with only tepid growth in key export markets of EU and a recent upturn in the US, the risk of slower economic growth and, in turn, oil demand remains. Despite this, we still expect oil demand growth to be above 3 percent for the whole of 2014, as government infrastructure projects, new refineries and oil stockpiling sustain demand. The Crimea standoff between Ukraine and Russia has stabilized with the Russian government sending less hawkish signals around the invasion of eastern Ukraine. Nevertheless, risks of further fall in demand in oil for Russia does remain as existing sanctions and record capital outflow from the private sector, at $50.6 billion in the 1Q 2014, up from $27.5 billion year-on-year, have hurt the economy with downside risks through weaker 2014 GDP growth, forecasted at 0.8 percent, down from previous forecasts of 1.3 percent. Indian oil demand will remain at around 2 percent for the next two quarters. Demand will be held up by continued expansion in the construction sector but remains open to downside risks through macro-economic uncertainty relating to a large fiscal deficit and capital outflows due to a lack of economic reform. Global oil supply grew by 0.4 mbpd year-on-year in Q2 2014, with non-OPEC supplies growing by 1.7 mbpd as a result of increased US oil production. In Q3 2014 there will be continued output increases from non-OPEC sources, led by the US, but ongoing tensions in Libya and limited growth in output from Iraq will result in OPEC output declining in 2014, year-on-year. The shale oil revolution in the US continues apace with production rising by 15 percent in Q2 2014, year-on-year. As economic recovery builds momentum, we expect to see increased investment in both non-conventional and conventional oil resources which will expand output by 12 percent in second half of 2014. US production will average 8.42 mbpd in 2014 and 9.27 mbpd in 2015 and this will be accompanied by declining oil imports, which will average 7 mbpd in 2014 and 6.2 mbpd in 2015. By 2015, imports of oil will represent 36 percent of total US energy consumption, compared to 58 percent in 2010. With the political tensions around Crimea stabilizing, Jadwa forecast a decreased risk in disruption on Russian oil supplies. In 2014, total Russian crude production will grow by just under 1 percent. Russian oil output growth has been on a downward trend in recent years, as many of the western Siberia oil fields, which yield two-thirds of total production, are very mature and require more capital-intensive investment to maintain output levels. Total output from OPEC dropped by 4.5 percent in Q2 2014, year-on-year. OPEC continues to be affected by large falls in Libyan output, down 84 percent in Q2 2014, year-on-year. Latest OPEC data shows that Iraqi crude production rose by 2.6 percent, year-on-year, in Q2 2014, to 3.1 mbpd. We believe that the current civil strife in Iraq will not negatively impact oil output going forward. This is because, firstly, the main oil facilities are located in the south of the country where 90 percent of Iraqi crude exports are shipped from, and these areas have been unaffected by the violence. In northern Iraq around 0.2 mbpd of oil supply has gone offline as the main delivery point of this crude, the Baiji refinery, has been captured by insurgents. Secondly, insurgents in the north-west do not enjoy the same level of political support in the oil areas of the south and, lastly, any further push south by these groups is likely to draw military action from US, Iraq and Iran. In fact we see the main threat as coming from small scale attacks that add to a negative market perception which, in turn, keep a floor on oil prices. As such we forecast that Iraqi oil production will remain around current levels. According to the South Oil Company, exports from southern Iraq dropped by 7 percent in June, month-on-month, to an average of 2.4 mbpd. These drops were attributed to upgrades and expansions work related to new export infrastructure which, after completion, will help increase the level of exports during the second half of 2014. The ongoing troubles in Libya continue to depress crude output, with total Libyan production lost since August 2013 now exceeding 350 million barrels. A recent agreement between the government and rebel groups has resulted in the opening of two terminals, with the potential to expand total output to 0.7 mbpd, up from Q2 2014 average of 0.2 mbpd. Although these are welcome positive political developments we still expect limited uptick in oil output from Libya as, firstly, the pattern that has emerged from the country seems to be that any positive development is likely to be reversed very quickly and secondly, even if the current agreement is genuine, export shipments are likely to face technical delays due to damage and neglect. As such, Jadwa forecast limited improvement in sustained Libyan production and exports for the remainder of 2014. Iran's crude output decreased 14 percent year-on-year in Q2 2014, to 3.2 mbpd, but rising levels of exports are helping to reverse the declines in production. Under a Joint Plan of Action (JPAO) signed in November 2013 between the US and Iran, exports were to be limited to an average of 1 mbpd through to July 2014. In the first half of 2014, Iran has exported an average of 1.2 mbpd, with China being the largest customer. Whereas Japan, India and South Korea have cut back on purchases, China has not and is not expected do so going forward. Oil production from Nigeria rose 12 percent during Q2 2014 year-on-year, but theft, sabotage and a worsening security situation point towards increased downside risk to the country's oil output. According to the Nigerian National Petroleum Corporation (NNPC) around 0.3 mbpd of crude was lost to theft and sabotage in 2013. On top of this an insurgency in northern Nigeria is adding to security fears. So far, much of the security problems have been concentrated in the north but any spread of attacks further south could target oil infrastructure which would no doubt contribute to fluctuating and unpredictable output. Brent prices edged up 1 percent in Q2 2014, to $110 per barrel, compared to the previous quarter, as developments in Iraq added to the already elevated prices seen since the beginning of the year due to the crisis in Libya and Ukraine. With moderate growth in global oil demand and accelerating non-OPEC supply, global balances will be in surplus for 2014, but this will not translate to lower crude prices as geopolitical tensions prevent prices from falling, with the current situation in Iraq adding to volatility. Furthermore, we also see an additional floor on prices on the back of higher costs of production related to US shale oil, which is increasingly contributing to a larger share of global oil output.
