Unveiling the Underlying Cause of Oil Price Pressure: Stagnation of Global Oil Consumption

John Kemp, a Reuters market analyst, wrote on Wednesday that global oil consumption has stagnated since mid-2018, causing oil prices to inevitably fall despite Saudi Arabia and its allies’best efforts to cut production.

The 18 largest oil consumers in the world consume more than 1 million barrels of oil per day, accounting for nearly two-thirds of global consumption, which can roughly effectively reflect global demand. Data from the Joint Organisation Data Initiative (JODI) show that oil consumption in these 18 countries increased by only 0.7% in the three months to March compared with the same period last year.

Oil consumption data for most of these countries are two months behind schedule, and data as of May have been released, but data for China, India and Thailand are released later.

Excluding the three countries whose data were released later, the largest 15 oil consumers accounted for 45% of global consumption, and their consumption fell by 2.2% in the three months to May, the largest decline since the 2008/09 recession.

Since 2006, consumption growth in the 15 largest oil consumers has been a reliable leading indicator of the top 18, and demand has been wider. Given the interconnectedness of the global economy, this is not surprising.

Since the second and third quarters of 2018, the slowdown in oil consumption has been closely related to the slowdown in global manufacturing activities and freight volume. Given the slowdown in oil consumption, it is inevitable that oil prices will fall sharply despite the action taken by Saudi Arabia and its OPEC + allies to limit production.

Previously, when oil consumption slowed down in 2006/07, 2008/09, 2011/12 and 2014/15, it was accompanied by a sharp fall in oil prices, which eventually brought consumption and production back to balance. Production restrictions in 2019 prevented a sharper decline in oil prices, but inevitably lower oil prices must help to recover lost consumption growth.

Kemp points out that only when the global economy avoids recession and oil consumption growth starts to accelerate again will oil prices continue to rise.