OPEC has to pin its hopes for demand growth on China and, to a smaller extent, India. Take a look at what OPEC had to say about China’s demand for this year and the next:
Projections for China’s oil demand in 2019 and 2020 are firm and strong, largely driven by stable economic growth and further development of the petrochemical and transportation sectors. Middle distillates are anticipated to lead demand growth for products with jet fuel also contributing. Diesel fuel will be positively affected by the low baseline estimate for 2019 plus a slight pickup in other sectors. Light distillates, particularly LPG, are also projected to provide strong support for oil demand growth in 2020. However, factors to be closely monitored include economic developments, the extension of emission-reduction programmes, and the continuation of fuel substitution with natural gas.
The cartel has packed a lot of potential downside into that last sentence.
OPEC expects crude oil demand growth in China to increase by 350,000 barrels a day this year and another 320,000 barrels a day next year. As we noted on Thursday, Saudi Arabia is sending a lot more oil to China these days, so the Saudis are already betting that they can pick up lasting market share in China. In a roundabout way, however, Iran is keeping its pipeline to China as full as it can in the face of tough U.S. sanctions.
India’s projected demand growth comes primarily for gasoline. According to OPEC’s August report, crude demand is down 77,000 barrels a day this year, while gasoline demand is up by 83,000 barrels a day, a jump of nearly 11%. Saudi Aramco’s $15 billion investment in Indian refiner Reliance Industries provides Aramco with another bit of market share in a global market that is likely to continue shrinking as economic conditions worsen and fewer autos are sold.
When people turn to electric vehicles in a few more years (as they are forecast to do), not the Saudis or Russia or any other country or company is going to be able to stop the decline in demand for oil.
OPEC has acted for decades now as if it has the same clout it had in the 1970s and 1980s. The shale revolution in the United States ended OPEC’s hegemony, and the cartel has failed to lift crude prices either by flooding the market and driving out competitors that can’t produce at the same low costs or by withholding oil in an effort to drive prices up as customers are forced to pay more.
U.S. production responded to both those weapons, and now OPEC is nearly out of bullets. All it has left is time. Will U.S. shale production decline as some have predicted, or will it be able to match low-cost crude production of Russia and OPEC and keep the playing field level?