Global oil demand growth to partly recover in 2017: BofAML

Global oil demand growth has been “underwhelming” so far in 2017, but should make a partial recovery during the rest of the year, Bank of America Merrill Lynch (BofAML) said in a report on Wednesday.

Global growth came in at just 1.1 million barrels per day (bpd) year-on-year (YoY) in Q1, as OECD demand remained stagnant.

“The US in particular saw a drastic slowdown on lower demand for gasoline,” BofAML said.

Nonetheless, the bank expects recovery in demand as certain negative factors, like demonetization in India or the recessions in Brazil and Russia, recede. The Indian government announced in November last year that all ₹500 and ₹1,000 notes would cease to be legal tender, as part of efforts to curb the flow of illicit and counterfeit cash.

Meanwhile, diesel is expected to return to positive demand growth in 2017 and 2018, from declines last year.

The US has mainly been leading this trend, with demand averaging 4.2 million barrels per day (bpd) over the past five weeks, compared to 3.9 million bpd over the same period a year ago.

However, the demand recovery does not translate into a bullish outlook in the short-term for distillate margins, as increased demand for diesel can be met from current surplus inventories, the report said.

“In addition, refinery activity in the US remains exceptionally strong on healthy margins, boosting output of all refined products, and creating a high level of exports. The issue of diesel over-production is not just confined to the US, as increased supplies have come from North West Europe, China, Saudi, and Russia,” analysts at BofAML said.

On the demand side, global diesel demand is expected to structurally outperform gasoline in coming years, and will benefit from new regulations by the International Maritime Organization (IMO), which will likely lead to a switch to diesel for marine fuel.

“On the supply side, the crude oil slate is becoming lighter on the back of a return of US shale oil production and a cut to OPEC's heavy barrels. While the fortunes may eventually turn for diesel, we think any recovery will likely be gradual,” BofAML said.