Global oil demand has defied even the most optimistic expectations this year, providing crucial support to oil prices. The recent demand response has come on the back of low oil prices, not a cyclical upturn, according to Bank of America Merrill Lynch. “...and we see no imminent change,“ Merrill Lynch says. Given rising OPEC output, demand may have to work hard to absorb the surpluses, and oil prices could stay low for longer, the banking firm says.

Oil demand has defied even the most optimistic expectations this year, providing key support to oil prices. Globally, demand expanded by 1.6 mn b/d YoY in 1H15, almost twice the average growth rate in the last four years. Demand in the US and Europe came in above forecast, though data in the latter was distorted by a cold winter.

The strongest area of growth is non-OECD (up a whopping 950 k b/d YoYYTD), despite demand in key oil exporting regions contracting. EM Asia has been driving EM growth on the back of lower oil prices, with China and India at the helm.

In contrast, cyclical factors are taking a back-seat as GDP growth has disappointed. With the Fed embarking on interest rate rises later this year and Asian countries facing a potentially weaker CNY, this trend may continue.

The near-term cyclical backdrop for EM Asia continues to look soft. Still, we estimate short-term oil price elasticities of demand at around 2-4% depending on the country. EM Asia is among the most price-sensitive demand region, both in the short-term and over a 5-year horizon.

“In sum, our work suggests most of the recent demand response has come on the back of low oil prices, not a cyclical upturn, and we see no imminent change,” Merrill Lynch said.

How sustainable is this demand rebound then? The surprising strength in demand, together with opportunistic stock-building, absorbed more of the global crude oil surplus than expected. But the physical market balance is weakening rapidly at the moment on a confluence of macro and micro factors.

Unless non-OPEC oil production declines rapidly into 2016, Saudi production stops increasing, or Iranian barrels seep into the market at a slower-than-expected pace—all ‘big if’s’—price-sensitive oil demand may have to work hard to absorb the ongoing surpluses. All else equal, this means crude oil prices could stay low for longer.
Source: Bank of America Merrill Lynch