Since June 2014, the global oil markets have been on a wild ride. Last week, BTU Analytics hosted ‘What Lies Ahead – an Oil and Gas Conference‘ in Houston and one of the topics discussed was the role of North America in the global energy market. With the futures curve for WTI getting whipsawed each day on news of OPEC emergency meetings, Saudi Oil Ministry posturing, Iranian production coming to market and weak Chinese demand – to name a few – this blog will take a step back and look at big picture macro trends in the global energy market. Even though the current energy market correction has been ruthless and may not be over, there are some positive trends out there.
The correction of course is the result of too much crude production growth in the face of demand growth that could not keep pace. In the slide below, the relentless jump of more than 5 MMB/d in 2014 & 2015 and corresponding price response can be seen. On the right we can see that comparing 2013-2014 to 2014-2015 crude oil production growth shows OPEC pushing production stubbornly higher while the US and Canada, with our liquid and capital efficient markets, reacted to lower prices. One good sign of progress on re-balancing the global oil market.
While renewables have started to show impacts to the N. American gas market, especially as a result of wind in the Midcon and solar in California, globally it is hard to get too excited about renewables cannibalizing oil and gas demand. In the slide below, we can see in 2014 86% of total global primary energy consumption was met by oil, coal, and natural gas – see below left. Below on the right, the time series shows global primary energy consumption highlighting the slice of renewables at just 3% in 2014.
There has been lots of hype recently about EVs replacing the internal combustion engine and impacting refined product demand (and admittedly we have thrown gas on the fire – Are Tesla, Uber, Apple and Google Taking a Cut of Long-Term Refined Product Demand?). However, the 7.3 billion people in this world all want higher standards of living which means more mobility resulting in ever climbing levels of light and middle distillate demand as shown below by OECD and Non-OECD countries. Remember, OECD countries represent 1.3 billion people while Non-OECD countries represent the remaining 6.0 billion people. Yes, OECD country demand has stagnated and is off slightly but overall there is a big slice of population to drive growing demand. 
As shown above, the world consumes 64 million barrels/day of light and medium distillates of which the US represents 14.8 million barrels/day and China 7.7 million barrels/day. When we look at distillate demand on a per capita basis for the US (population 320 million) and China (1.4 billion) we see in the slide below that consumption in the two countries is converging but still has a considerable gap to fill (left hand graphic). In the bottom right graph, the same data is put on two separate axis and we can see how fast China consumption per capita has been growing. With China having a population over 1.4 billion and a climbing per capita consumption, the result is big absolute demand numbers coming to fruition quickly. The thing to remember in 2016 is that China demand is still growing, albeit at a slower rate, but even a small response in consumption in China has big reverberations in global markets.
The OECD projects that the global population will grow to 7.7 billion by 2020 further driving these trends. As is often said these days ‘the cure for lower prices is low prices’ its just a matter of re-aligning global crude oil supply and demand balances. To see BTU Analytics’ North American crude oil production forecasts – request a copy of the BTU Analytics Upstream Outlook.
