Crude Oil: Demand outlook remains positive for 2018 - Westpac

Justin Smirk, Research Analyst at Westpac, suggests that their broad global demand indictors (global PMIs, industrial production and trade) ended 2017 on a very strong note and have continued to strengthen through early 2018 and clearly the global demand backdrop is distinctly more robust at this stage than were they thought it would be.

Key Quotes

“The US is part of this story and was on a sound growth path at the start of 2018. US miles driven, a good proxy for oil demand, continues to grow from the 2016 recovery highlighting how low oil prices have helped to spur on economic activity in the US.”

“Since the start of the year there has been a significant change in US fiscal policy. Congress passed a $300 billion (1.5% of GDP) spending package over the 18 months from April 2018. This followed on from earlier approved Tax Package that was estimated to have a current cost of $1.5 trillion over 10 years. With momentum in the US economy already lifting and the unemployment rate, at 4.1%, comfortably below the estimated full employment rate (4.5%) there have been concerns raised about stimulatory fiscal policy overheating the economy. Arguably we have not seen a comparable policy "mix" since the 1960’s.”

“It is clear that the introduction of the new spending package will boost growth, at least for the near term, so we have raised our forecasts for GDP growth in the US from 2.5% in 2018 and 2.2% in 2019 to 3.0% and 2.5% respectively. This has seen us lift our forecast for global growth from 3.8% in 2018 to 3.9%.”

“Given this we do see some modest upside to the EIA's estimates for demand which they see lifting 1.9mbd through 2018. This growth can be broken down to 0.57mbpd from the OECD, 0.40mbd increase from China and 0.86mbpd from the rest. Westpac has Chinese growth slowing this to 6.2% in 2018 so we are comfortable with the steady demand growth profile there while the rest of the world is likely to match the 2017 lift in demand in 2018.”