Oil demand is expected to rise in the third quarter of this year due to the summer peak season and a sustained recovery in the US economy plus steady growth in China, a report said.

Non-Opec supply will exceed global demand growth in 2014 but this will not translate to lower Brent prices, as geopolitical issues in Ukraine, Libya and Iraq keep a floor on prices. As a result, Brent oil is expected to average around $109 per barrel in 2014, the Jadwa Investment oil market report said.
 
According to Opec data, global demand in Q2 2014 increased by 1 mbpd year-on-year with 1.2 mbpd increase from non-OECD countries and a drop of 0.2 mbpd in OECD countries.

The US is the main source of demand growth amongst the OECD countries. Further evidence of a full scale recovery in the US economy was provided by higher Q2 2014 manufacturing PMI’s, which will contribute to US oil demand rising to an average of 15.6 mbpd in 2014, up 2.1 percent, year-on-year.
 
EU oil demand growth will continue to be weak due to the stuttering economy; Q2 2014 PMI’s declined slightly, compared to the previous quarter. Although the EU economy is expected to improve marginally over the second half of the year, as the fiscal position of the southern European economies continues to improve and industrial production recovers, structural changes through continuing improvements in fuel economy standards will mean growth in oil consumption will be limited for the foreseeable future.
 
Japanese oil demand in Q2 2014 was broadly unchanged year-on-year and will remain flat during the remainder of 2014 due to changes in the energy landscape, it said.
 
China’s economy gained pace in June on the back of improving demand at home. Manufacturing PMI’s improved in Q2 2014, with June’s PMI rising above the 50 mark for the first time in 2014. However, China’s ability to meet its forecasted annual GDP of 7.5 percent is also contingent on the strength of overseas demand, and with only tepid growth in key export markets of EU and a recent upturn in the US, the risk of slower economic growth and, in turn, oil demand remains. "Despite this, we still expect oil demand growth to be above 3 percent for the whole of 2014, as government infrastructure projects, new refineries and oil stockpiling sustain demand," said the report.
 
Indian oil demand will remain at around 2 percent for the next two quarters. Demand will be held up by continued expansion in the construction sector but remains open to downside risks through macro-economic uncertainty relating to a large fiscal deficit and capital outflows due to a lack of economic reform, the report said.
 
Saudi Arabia's consumption averaged 1.9 mbpd in the first half of 2014, up 28 percent, year-on-year. This rise was much higher than other GCC countries, which only increased by an average of 1 percent, over the same period. The sharp rise in oil demand from Saudi Arabia is largely a result of the startup of the 0.4 mbpd Satorp refinery in Q4 2013, which has pushed up refinery intake levels since the beginning of the year. Going forward, increased demand for generation in electricity during the summer months will see Saudi Arabian oil consumption rise in Q3 2014 and continuing economic growth will sustain oil demand throughout the remainder of 2014, it said.

Supply
 
Global oil supply grew by 0.4 mbpd year-on-year in Q2 2014, with non-Opec supplies growing by 1.7 mbpd as a result of increased US oil production. In Q3 2014 there will be continued output increases from non-Opec sources, led by the US, but ongoing tensions in Libya and limited growth in output from Iraq will result in Opec output declining in 2014, year-on-year.  
 
The shale oil revolution in the US continues apace with production rising by 15 percent in Q2 2014, year-on-year. As economic recovery builds momentum, it is expected that increased investment in both non-conventional and conventional oil resources which will expand output by 12 percent in second half of 2014.

US production will average 8.42 mbpd in 2014 and 9.27 mbpd in 2015 and this will be accompanied by declining oil imports, which will average 7 mbpd in 2014 and 6.2 mbpd in 2015. By 2015, imports of oil will represent 36 percent of total US energy consumption, compared to 58 percent in 2010.
 
Total output from Opec dropped by 4.5 percent in Q2 2014, year-on-year. Opec continues to be affected by large falls in Libyan output, down 84 percent in Q2 2014, year-on-year.
 
Latest Opec data shows that Iraqi crude production rose by 2.6 percent, year-on-year, in Q2 2014, to 3.1 mbpd. The report says that the current civil strife in Iraq will not negatively impact oil output going forward. This is because, firstly, the main oil facilities are located in the south of the country where 90 percent of Iraqi crude exports are shipped from, and these areas have been unaffected by the violence. In northern Iraq around 0.2 mbpd of oil supply has gone offline as the main delivery point of this crude, the Baiji refinery, has been captured by insurgents. Secondly, insurgents in the north-west do not enjoy the same level of political support in the oil areas of the south and, lastly, any further push south by these groups is likely to draw military action from US, Iraq and Iran.

Saudi Arabian crude production was up by 2 percent in Q2 2014, year-on-year, bringing the first half 2014 production average to 9.7 mbpd, up from 9.3 mbpd over the same period in 2013. "We had previously forecasted full year 2014 average Saudi production at 9.4 mbpd, but we are now revising this upwards to 9.7 mbpd. A number of factors have led us to revise our production forecast, including continued outages and slower growth in output from other Opec members, faster than expected upturn in the US economy resulting in higher demand for Saudi crude, and higher year-on-year domestic Saudi consumption," the report said.
 
In the previous forecast one primary assumption had been that Saudi Arabia’s share of total Opec production would gradually fall during the year as output from Libya came back online and Iraqi production steadily rose to around 4 mpbd over the course of 2014. As pointed out earlier, we now do not see Libyan supply returning to normal levels until after 2014, whilst security and infrastructure issues in Iraq will prevent production from rising beyond current levels for remainder of the year.
 
"We also see some rises in demand for Saudi crude coming from an improving US economy. Although shale oil has allowed the US to reduce its imports of crude oil, these reductions have affected producers of mainly lighter crude types, such as Nigeria, but because a majority of US refineries are still configured towards processing heavier crudes, imports from Saudi have not been adversely affected. In fact, in the first half of 2014 Saudi crude exports to US averaged 1.4 mbpd, up from 1.2 mbpd in same period last year," the report said.
 
Furthermore, increased demand for generation in Saudi Arabia electricity during the summer months in Q3 2014 and continuing economic growth throughout the remainder of 2014 will result in Saudi domestic consumption not changing substantially from first half 2014 average consumption of 1.9 mbpd.
 
As a result of the factors outlined above, Saudi Arabia production is expected to average 9.7 mbpd for 2014 as whole.  - TradeArabia News Service