BUSINESS MAVERICK ANALYSIS

Global oil demand growth slows in double-edged sword for SA as trade war heats up

By Ed Stoddard 14 August 2019
Caption
A lower oil price should translate into lower South African pump prices in coming months, if the rand holds its own — but a falling oil price is a big red flag about the outlook for the global economy.
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Last week, the International Energy Agency (IEA) said growth in the demand for oil had braked to its slowest pace since the global financial crisis of 2008. US President Donald Trump’s reckless pursuit of a trade war with China is partly to blame for this reversal in oil’s bull run, which will also set back US economic growth. For South Africa’s vulnerable economy, this is a double-edged sword.

South African consumers should perhaps be thankful to the current occupant of the White House. Donald Trump has triggered a trade war with China and in the process mounting concerns about global economic growth have brought oil prices down. This should translate into lower South African pump prices in coming months, if the rand manages to hold its own.

The price of crude oil has swung wildly over the past year. In October 2018, it was fetching around $86 a barrel. It then fell to below $55 before rebounding, reaching over $75 in April. It is now below $59, a loss of more than 20% since its 2019 highs in April, and it looks as if the bottom of the barrel has not been reached.

In large part, this is because of a slowdown in demand growth. The International Energy Agency (IEA) said last week that the pace of growth in demand was at its slowest since the global financial crisis more than a decade ago. This is hardly because of a surge in demand for electric vehicles. It is, rather, a big red flag about the outlook for the global economy.

Oil demand growth estimates have already been cut back sharply. For the OECD as a whole, demand has fallen for three successive quarters,” the IEA said. “The outlook is fragile with a greater likelihood of a downward revision than an upward one.

There have been concerns about the health of the global economy…shown by reduced expectations for oil demand growth. Now, the situation is becoming even more uncertain: the US-China trade dispute remains unresolved and in September new tariffs are due to be imposed. Tension between the two has increased further, reflected in heavy falls for stock and commodity markets. Oil prices have been caught up in the retreat,” it said.

The IEA cut its 2019 global oil demand growth forecast to 1.1 million barrels per day (bpd). Last year, the IEA predicted that 2019 oil demand would rise by 1.5 million bpd.

Broadly, this is good news for South Africa. Lower oil prices can help to reduce business costs while curbing inflation, which in turn could boost prospects for further interest rate cuts. It also frees up disposable income that can be spent on other things aside from petrol at the pumps.

But inflation is not a pressing concern for South Africa’s economy and policymakers. Among other things, the big concerns at the moment are the sluggish pace of economic growth – if the economy is even growing – soaring unemployment, and a lack of investment to kick-start the economy.

Slowing global growth will do nothing to help alleviate the situation on those fronts, and holds out the grim prospect of setting South Africa back even further. US economic growth, which has been perky, is also under threat – a significant reason for the economy’s performance has been high oil prices, as the US is now the world’s largest producer of crude oil.

It is a double-edged sword and one that is being wielded by the White House. BM

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