Oil companies are moving aggressively to cut excess supply in the face of a glut, but weak global growth is expected to dampen any recovery in crude prices over the next two years.
There are some signs of a demand response to oil's price swoon – gasoline sales were up sharply in some states last fall while sales of sports utility vehicles soared at the end of the year. But an increase in North American gasoline and diesel consumption will provide only modest and temporary support for crude prices.
"The kind of demand growth we need to push prices higher is not the demand response you'll get because oil is $45 a barrel," Avery Shenfeld, chief economist at CIBC World Markets Inc., said in an interview. "We need the demand growth that comes from better global economic growth."
But even as oil prices fell sharply through the late fall and early winter, economists were revising their expectations downward for the world economy.
The International Monetary Fund recently cut its forecast for global growth by 0.3 percentage points in each of the next two years, to 3.5 per cent this year and 3.7 per cent in 2016.
The IMF said lower crude prices will give the economy a boost, but that impact will be more than offset by weakness elsewhere, notably the slowdown in China and in other commodity-based emerging economies. The oil-based economies of the Middle East had been one area of strong demand growth, and they are now expected to slow.
For its part, the International Energy Agency noted the global economic slowdown was partly responsible for the staggering decline in crude prices since June. Even with that slump in prices, the IEA forecast last month that crude demand will grow just 900,000 barrels a day this year, up from 600,000 b/d last year, but not enough to sop up excess supply.
Futures prices rebounded sharply on Friday after reports showed the number of oil rigs operating in the United States has declined by 25 per cent from peak summer levels. International giants such as Royal Dutch Shell PLC, Chevron Corp. and ConocoPhillips Co. have slashed their capital budgets by tens of billions, and Exxon Mobil Corp. is due to report its capital investment plans on Monday.
Still, North American production is expected to continue to rise, at least through the first half of 2015, and analysts expect further downward pressure on prices.
There are a number of factors that will dampen the demand response that would be typically expected from a 60-per-cent drop in prices. Currency fluctuations have offset the drop in crude prices in many markets. Like Canada, most countries have seen their currencies weaken against the U.S. greenback, which makes dollar-denominated commodities such as oil more expensive in the local currency.
Several large emerging economies, notably India and Indonesia, have long subsidized the price of gasoline and diesel fuel and are taking advantage of the drop in crude prices to slash those subsidies, at the urging of the United Nations and International Energy Agency.
Economists expect to see a demand response in North America, but in the short term, the growth in oil consumption will relate more to growth in the U.S. economy than changing consumer habits.
Data on gasoline consumption in the United States and Canada are slower to emerge and less reliable than supply figures. But sales tax figures from some states – notably California – do show there was a spike in demand last fall, Reuters market analyst John Kemp wrote last week.
Industrialized world oil demand peaked in 2005, and many economists don't expect it to exceed that level, even with the stimulus of lower prices.
"We are on a long term trend of decelerating global oil demand growth," said Jim Burkhard, head of oil market research for IHS Inc. Oil demand as a percentage of global GDP is now half what it was in 2000 due to fuel switching, greater efficiency and growth of the service economy.
In the United States, Mr. Burkhard said a combination of factors – fuel economy standards, an aging population and cultural change – will mute the response to low prices.
Even China has seen a decoupling of petroleum demand from economic growth; oil consumption grew an estimated 3.5 per cent last year, while Chinese economic output rose 7.5 per cent. Some economists are still bullish on China – arguing rising wealth will result in a sharp increase in the number of automobiles on the road.
But Mr. Burkhard said China is also facing some demographic changes that will slow the pace of growth in car ownership, notably the decline in its working-age population and the overcrowding of pollution-choked, traffic-congested cities.
Those factors, together with an increased push to limit carbon pollution, will limit the growth in oil demand and keep downward pressure on prices, he said.