Posted on November 24, 2017

Firming economic activity will support stronger fuel consumption in the GCC region in 2018, but continued energy sector reforms will anchor growth substantially below the pre-oil price crash norms, BMI Research has said in a report.

High frequency indicators signal that fuels demand in the GCC has begun to normalise. Fuel consumption in the region has slumped over 2016 and 2017, driven down by domestic subsidy cuts, and weakened economic performance. The demand has been slower to normalise than BMI had initially anticipated, in part due to the pace and depth of subsidy reforms. However, broadly speaking, consumption declines appear to be softening and growth gathering pace.

From 2018, the Fitch group company forecasts a normalisation of demand supported by a pickup in economic activity in the GCC region. However, the pace of growth will remain subdued, dragged down by ongoing energy reforms and, to a lesser extent, continued switching from oil to gas. On balance, diesel has been the most exposed to the downturn, in particular in Saudi Arabia. This reflects a range of factors including the deeper cuts to diesel subsidies in the country and the start-up of a new gas plant displacing oil in the power sector. Diesel demand also closely tracks developments in the economy and contractions in energy-intensive industries such as construction and cement have weighed heavily to the downside.

Gasoline consumption in the country was relatively less impacted, largely due to the lack of public transport alternatives. Rather, households coped with higher price levels through a switch to lower grade fuels. However, demand in most other markets in the region was significantly more price elastic, registering steep year-on-year declines in countries such as Oman and Qatar. Gasoline demand has also been quicker to normalise than diesel and appears to be trending upwards in most cases. Overall, the outlook for 2018 is significantly brighter. BMI analysts forecast stronger economic growth in the region, as the continued recovery in oil prices eases fiscal constraints on governments and improves both consumer and investor confidence.

This will also be reflected in the auto market, with vehicle sales growth rebounding to positive territory next year, lifting demand for fuels. However, while the outlook is generally improved, BMI noted fuel demand will not return to its pre-oil collapse norms. Largely this is due to further incremental energy sector reforms in the region, which will continue to rationalise demand. Another factor is the strategic push in a number of markets to reduce the share of oil in the overall energy mix in favour of gas. This strategy has been underway for a number of years and has led to continued strong gains in gas demand, even as fuels demand has collapsed, BMI added.

source: Gulf Times