The U.S. and India will drive oil demand growth in the future – Raymond James

China’s economy has been a demand-growth powerhouse over the course of the last decade as the country’s industrial sector boomed, but China’s role in global demand growth will be on the decline moving forward, according to research from Raymond James.

Stepping up to take China’s place at the center of global oil demand growth is the rest of Asia, led by India, and the United States.

In 2015, global oil demand is up by approximately 2 million barrels per day (MMBOPD), or just over 2%. That is the fast growth in oil demand since 2010, when there was a “snapback” in demand growth following the global economic crisis. If you exclude the snapback growth, the last time underlying demand growth was faster than 2% was in 2004, more than 10 years ago. Low oil prices brought on by the global glut gave demand a strong tailwind that is unlikely to factor in as prominently in the years to come, but demand growth is still expected to continue in a positive direction. Raymond James believes that global oil demand growth will reach 1.5% next year, and 1.2% in 2017, even as oil prices go higher.

RayJ Global Oil Demand GrowthLooking at the overall demand picture for this year, Chinese oil demand made up about 25% of global growth, with Asia ex-China, and the U.S. making up about equal parts of the demand growth picture as well. Putting that into perspective, China’s 2010-2014 demand growth made up an average of 42% of global growth, while Asia ex-China and the U.S. demand growth made up just 12% each over the same time period.

The demand growth in Asia ex-China and the U.S. is not only significant in terms of a five-year average, it is also three-times the level of demand growth the two areas saw just a year ago.

2015 gasoline demand will be the fastest growing in thirty years

Driving demand growth in the United States is greater use of gasoline, reports Raymond James. Looking at the Energy Information Administration’s (EIA) weekly, gasoline demand is averaging over 4% year-over-year growth. Adding in the more accurate, but less up-to-date monthly reports, as a lower-case scenario for growth, demand will likely be 3%, or 300,000 barrels per day (MBOPD), reflecting what would be the biggest surge in gasoline demand that the U.S. has seen in over three decades.RayJ US Gasoline Demand from EIA Weeklys

This growth in gasoline demand has come not only from the decline in crude oil prices, which in turn led to lower prices at the pump, but also by improved employment numbers and more miles driven in the United States. The relationship between gasoline prices and gasoline demand is fairly strong, with a 2.7% decrease in demand when prices at the pump increased by 26% in 2011, but employment also plays a key role in understanding overall demand.

A 29% decrease in gasoline prices since 2014 has led to a 3.5% increase in demand, said Raymond James, but this increased use of gasoline was helped by lower unemployment, higher vehicle miles traveled and stronger vehicle sales, particularly of light-duty trucks. Without the positive support of those stronger overall economic data, gasoline demand can sink along with prices, like the demand drop seen in 2009 following the economic crisis.

RayJ US Gasoline Demand and Prices

Raymond James expects oil prices to recover and rebalance global crude markets by mid-2016, which may put downward pressure on gasoline demand, but continued expectations of economic growth will likely push demand higher next year as well, the analysts said. Gasoline demand is expected to grow by an additional 150 MBOPD in 2016, while overall demand growth is expected to increase by 300 MBOPD, accord to Raymond James.

This would help to tighten the already oversupplied market globally, with U.S. representing approximately one-fifth of total global oil consumption. Demand has declined about 1% annually over the past decade in the U.S., so a 3% increase in 2015 Raymond James expects would send very bullish signals to the global market.

RayJ US Share of Total Global Oil, Demand

Source: Raymond James

The 53% of oil demand in the U.S. that is not gasoline is also showing strong signs of growth this year. According to EIA weekly data, total petroleum product demand has averaged around 3.5% more than last year, while monthly data shows growth of about 2.6%. Averaging those two numbers, a roughly 3% increase in demand for 2015 would translate into nearly 600 MBOPD of incremental U.S. crude demand growth, the fastest growth rate since 2004, and significantly more bullish than the negative 90 MBOPD annual average over the past decade.

India set to take center stage in Asia

While the U.S. is expected to play an important role in continued oil demand growth, emerging markets in Asia will be more central to long-term oil demand growth than the U.S., said Raymond James.

India looks to be the main driver behind Asia’s future growth, replacing China. India’s GDP is expected to grow at a faster rate than China’s, with the International Monetary Fund (IMF) reporting GDP growth of 7.3% and 6.8% for India and China, respectively, in 2015, and a wider spread to 7.5% and 6.3% for the two countries next year. Raymond James also believes that India’s oil consumption intensity – defined as oil consumption per unit of GDP – is currently 16% higher than China’s, meaning growth in India’s GDP has 16% more effect on oil consumption than an equivalent change in China, all things being equal.

RayJ China and India Oil Consumption Intensity, Demand

Source: Raymond James. Oil consumption intensity is defined as defined as oil consumption per unit of GDP.

Both countries are working on using oil more efficiently, which in turn drives down oil consumption intensity, but China’s intensity has been declining much faster than intensity of use in India.

The natural progression of industrialization leads to lower energy intensity as services and light industry begin to take the place of heavy manufacturing, explaining the decline in China’s overall intensity of oil consumption as its economy makes a shift away from heavy industries. “Although it’s impossible to predict precisely when India will “catch up” with China in [the progression of industrialization], we think that India’s oil demand can (on average) grow faster than China’s over the next decade,” said Raymond James.

UN India China Population ComparisonIndia’s population is also expected to surpass China’s in the next ten years, according to United Nations’ forecasts. By 2022, both countries should have about the same population size of 1.4 billion, but the U.N. expects India to continue growing to about 1.7 billion in 2050, while China levels off around the 2020s and 2030s before declining, even when considering the Chinese government’s recent decision to end the “one-child” policy. The larger population in India will likely result in larger overall energy consumption as well.

Demand for other types of energy in India are also expected to balloon, with natural gas demand in the country expected to grow to 523 MMcm/d in 2018-2019 alone, a 30% increase from its current level of 405 MMcm/d, according to the country’s oil ministry.

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