Oil demand is ‘on the rocks’ and prices could buckle: BofA

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Oil markets could be in for a stormy year, according to a new report from strategists at Bank of America.

The report warns that crude demand is “on the rocks” and oil will “buckle” if global inventories continue to build.

According to BofA’s commodity research team, global oil demand growth decelerated to 890,000 barrels per day in the first quarter of the year, and data suggests consumption will slow further in the second quarter.

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At the same time oil inventories have swelled by 1.7 million barrels a day since mid-February.

“Supply growth contributed to the surplus, but demand is playing a role too,” said BofA.

The report suggests demand is declining in both the Organisation for Economic Co-operation and Development and non-OECD countries, and that gasoline demand in the United States dropped 230,000 barrels per day in the second quarter.

While consensus predicts an increase in oil prices in the third quarter, BofA researchers say it’s not yet clear whether the market will tip from a large surplus into the deficit needed to lift those prices.

Extended OPEC+ cuts will help if compliance is high and demand typically picks up in the third quarter. But if inventories continue to build “petroleum prices and structure will likely come under pressure,” they said. Refinery margins could fall further, especially in the Atlantic Basin where new capacity is due to come online.

BofA’s short-term outlook comes on the heels of a much wider debate that broke out last week.

Once we worried about “peak oil” — the fear that the world would run short of fuel — now the issue dominating the headlines is “peak oil demand.”

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This reignited last week when the International Energy Agency predicted that oil demand would peak in 2029.

“Oil companies may want to make sure their business strategies and plans are prepared,” said Fatih Birol, the IEA’s executive director. “Rising oil supplies could potentially weigh on prices through the end of the decade.”

OPEC reacted immediately, calling the report “dangerous” and saying none of its long-term forecasts included such a projection.

The peak demand debate is contentious, but it slightly misses the point, says Capital Economics. What’s even more important than when oil demand peaks, is how quickly it falls after that.

Capital’s own forecast is that demand will peak around 2030, and descend quite quickly.

But another thing to keep in mind about oil demand forecasts is that “relatively minor changes” can quickly throw the trajectory off course, said Capital.

“You only have to look as far as the EU’s imposition of tariffs … on Chinese EV’s for evidence of how progress on curbing oil consumption may get stuck in the mud,” said Joe Maher, an assistant economist with Capital.

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The debate rages on, and even the respected IEA has been known to get it wrong, says Bloomberg.

A decade ago, it was one of the voices warning of a looming oil supply “crunch” that never came.

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Canadian home sales fell 5.9 per cent in May from the year before, but some provinces took a bigger hit than others. Sales were down the most in Ontario, where they plummeted over 16 per cent, followed by British Columbia which saw a 12.5 per cent decline. Of the provinces where sales rose, Newfoundland and Manitoba led the way, with sales up almost 19 per cent and 14.5 per cent, respectively.

“May was another sleepy month for housing activity in Canada, although it may prove to be the last of those now that interest rates have moved lower,” Shaun Cathcart, senior economist for the Canadian Real Estate Association, said in a statement Monday.

Today’s Data: U.S. retail sales for May, industrial production and capacity utilization

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The market may only be pricing in two more Bank of Canada rate cuts this year, but economist David Rosenberg thinks it will be cutting at all four remaining meetings, which has some implications for investors, the loonie and almost everything else. Read his column

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Today’s Posthaste was written by Pamela Heaven, with additional reporting from Financial Post staff, The Canadian Press and Bloomberg.

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