LONDON: The European Union’s crisis holds political and economic leaders transfixed, but for the oil market it merely underlines the region’s established role as only a secondary engine to global energy demand. Britain’s vote to leave the European Union and strikes that crippled France’s energy industry in May, elicited barely a lasting ripple on global energy markets.
“In terms of oil, it’s the best place to have an economic slowdown without having a big impact on demand growth,” said Chris Main, oil strategist with Citi Group. “European industry just doesn’t contribute much to global demand growth.” In oil demand growth, and in refining, the spotlight has for long shifted to developing markets in Asia, the Middle East and even the United States, where drivers hitting the road in record numbers are fuelling a resurgence in demand growth. Oil traders are accustomed to seeing the EU as a market with barely any potential to use more motor fuel.
“GDP in the UK and Europe is not energy intensive, and indeed oil demand has been in decline (more or less) since 2007,” Jefferies analysts wrote in a note. Jefferies estimates that the impact on oil demand from changes to GDP in emerging markets is some five times what it is in Europe – “a far greater risk factor.”
The International Monetary Fund warned that Britain’s vote could set back its growth by 1.4 to 5.6 percent by 2019, and said it could also lower the growth forecast for Germany, the bloc’s largest economy. Typically during economic crises, fears over a drop in consumption stoke oil price declines. But Europe’s withered oil demand growth due to energy efficiency and a shift away from heavy industry has cut its importance to the world’s demand growth.
Because most European economies are no longer industrially focused, even the slip into recession that some economists warned could hit Britain has failed to create significant oil demand loss fear on the global level. According to the International Energy Agency, demand growth in Europe accounted for 180,000 barrels per day (bpd) in the first quarter of the year, dwarfed by the 956,000 bpd growth in Asia’s developing countries.
Risk consultancy Eurasia Group said that Europe’s 13.7 million bpd of total demand is only about 14 percent of the global total. It added that every 1 percent change in GDP would knock roughly 70,000 bpd off oil demand growth, a small figure compared with the group’s demand growth forecast of 1.5 million bpd in 2016 and 1.1 million bpd in 2017.
Amid fading demand, pressure on refiner profits forced the closure of more than 2 million bpd in European refining capacity over the last decade. This has limited the continent’s importance in producing the diesel, gasoline and jet fuel that flow through global markets.
In France, strikes in May closed nearly half its refineries, as well as its main ports, forcing it to tap strategic crude and fuel stocks to keep running. The shock boosted diesel profits, and led to hopes that a rush to restock would further support refining. When similar strikes hit the country six years ago, global oil prices spiked as it scrambled to restock.
Instead, French refiner demand has been subdued as they slowly unloaded the roughly 19 million barrels of crude that was stranded on tankers during the strikes, and strategic stock agencies also gave companies three months to return what they took during the industrial action.
The impact on diesel was blunted as well by the fact that refinery hubs have shifted out of Europe since the last strikes. Two French refineries have closed since 2012, while the Middle East has developed into a refining mega centre with massive, diesel-heavy units helping to pump a growing excess in European storage tanks.
This has kept prices across crude and refined oil products from spiking, as it did following the last widespread French strikes in 2012. “The Middle East was not supplying as much distillates as they are now, and Russia is exporting more distillates,” said KBC principal consultant Ehsan Ul-Haq of the changed market.
“A few years agothe impact was much bigger,” Ul-Haq said of the strikes, adding that now, “producers have more than enough diesel.” – Reuters