Oil demand growth likely to weaken in the second half of 2019, warns IEA

Bank of America Merrill Lynch maintains its $60 to $67 per barrel crude outlook because of shaky fundamentals

Brent finished at a seven-month low on Monday after the US designated China as a currency manipulator. Reuters

Demand for oil is expected to slow even further in the second half of this year as international policy institutions and investment banks downsize expectations due to weak fundamentals.

The International Energy Agency (IEA) revised downwards its growth forecast for oil to 1.1 million barrels per day (bpd) on the back of a weakening global economy and Chinese demand, Fatih Birol, director of IEA, told Reuters.

The demand forecast is expected to be drawn down even further for the remainder of the year, he added.

In May, the agency had pared down its headline demand forecast for the year by 90,000 bpd to 1.3 million bpd, due to weaker growth expected from Brazil, China, Japan, Korea and Nigeria. Last year, the IEA had predicted oil demand growth of 1.5 million bpd for 2019, however, the US-China trade standoff as well as the recessionary sentiments in the global economy have nudged the institution to lower its expectations repeatedly.

“China is experiencing its slowest economic growth in the last three decades, so are some of the advanced economies ... If the global economy performs even poorer than we assume, then we may even look at our numbers once again in the next months to come,” Mr Birol said.

The weakening demand also comes amid rising supply of crude from the US, which has cushioned oil prices from dramatic spikes instigated by geopolitical tensions in the Middle East.

Separately, in its weekly energy report, Bank of America Merrill Lynch said oil fundamentals remained frail due to "weak cyclical macro backdrop", with both global crude and petroleum stocks balanced and anchored around the five-year average.

Brent may continue to trade in the $60 to $67 per barrel range in the absence of the market's two biggest risks: escalating Middle East tensions and the trade tussle between the US and China, the investment bank said.

There were plenty of upsides to the market as well, BoAML said.

"The oil market has benefited from three 'puts' in the past few weeks: a Trump put following the cessation of trade hostilities after the G20 summit in Osaka; an extended Opec+ put with a deal into 2020 that will likely keep oil supply tight; and now a probable Fed rate cut in July," BoAML said.

Prices have remained fairly level over the past week, despite Iran seizing a British tanker and continued navigation threats for oil vessels passing through the Strait of Hormuz. Markets have remained well supplied and absorbed any downside risks.