Jaap Kalkman, global head, energy and utilities practice at Arthur D Little, said, Predicting oil prices is a difficult, even hazardous practice. Several factors can create a temporary or permanent effect on oil price.

He noted that while global oil demand growth is tapering off, it is expected to stay positive because the decline in countries in the Organization for Economic Cooperation and Development (OECD) is offset by growth in developing markets

OECD countries have reached the saturation level in demand, said Kalkman, while rising income levels in non-OECD countries are expected to keep driving demand beyond 2020. However, he added that by 2035, oil use per vehicle globally is expected to drop by 1.7 percent per year.

The petrochemical sector accounts for over 10 percent of total oil use, Kalkman reported. Demand growth from petrochemicals will come mainly from Asia and the Middle East.

Even though oil supply is keeping pace with demand, the era of cheap conventional oil has ended, said Kalkman, and dependence on unconventional resources has been increasing since 2005. The global supply/demand equation for oil has changed since last year with excess supply in the market, which has resulted in a steep drop in prices, he added. Current prices are below the long-run marginal cost of unconventional oil producers; therefore, in the medium term, prices are bound to go up.

Going forward, Kalkman predicted that average oil prices will fluctuate above the 30-year average of U.S. $50 per barrel, probably reaching U.S. $70/bbl by the end of 2016. The wealth transfer due to the oil price decline amounts to U.S. $1 trillion per year, he said, giving rise to substantial additional GDP growth in most of the world.

This GDP effect will result in an international car sales increase as the purchasing power of oil importing countries rises. On top of additional car sales, other effects in transportation markets will benefit the base oil market equally, Kalkman said.

Higher new car sales will lead to increased use of base oils, especially Group II and III. Cheaper fuel will lead to an increase in distances driven, benefitting all API groups. Group I may benefit most because owners of older car are arguably the most price sensitive, he noted.

In addition, cheaper fuel will lead to a substitution of public transportation by private transportation, Kalkman continued. The aviation, commercial road transport and other transportation subsectors will see a slight positive effect as well.

All of these trends will positively benefit global lube oil demand, driven by accelerated demand for Group II/III for newer cars as well as increased use of Group I due to more driving. The positive effect on the global base oil market will manifest itself differently in different regions, said Kalkman.

In summary, he said, North America will see lower gas prices partially offset by job losses in exploration and production. The net effect will be slightly more kilometers driven and increased substitution of Group I. Europe should benefit from lower energy prices plus increased Group I exports, potentially lifting the Eurozone out of recession and delaying plant closures.

Gulf Cooperation Council government deficits will have a mild negative effect on the growth of lubricant demand. Other Middle East and Asia-Pacific countries should experience a GDP boost, leading to increased car ownership and base oil demand (both Group I and Group II/III). For most developing countries, Kalkman concluded, lower oil prices will have a positive effect on GDP and lead to increased consumption and car use.

Banks Drive Growth

According to Natasa Nikolic, head of market and economic intelligence at Evonik, Central banks are currently the key growth drivers of the world economy. To boost the economy, they have expanded their balance sheets through a program called Quantitative Easing.

Nikolic said that Evoniks analysis shows that Asia-Pacific and North America will be the most important global growth contributors. Even with lower than historical average growth in China, Asia-Pacific is dominating global growth in 2015, she said. North Americas contribution to global growth is in line with its share of world GDP.

Europe is expected to show more growth momentum in 2015 to improve its contribution to global growth. However, she noted, Latin America is far from its ambitious former years of being a growth driver for global GDP.

Overall, 2015 growth is expected to be in line with 2014 as diverging trends offset one another, said Nikolic. The United States remains the backbone of the global economy; however, its downside risks have increased.

She predicted that Europe has more momentum and is expected to grow due to the Central Banks Qualitative Easing program, a weaker euro, cheaper oil and less restrictive fiscal policy. Chinas slowdown continues, but government intervention should help, she added. However, Russia has seen a steep fall in its economy due to the ruble crisis and the conflict in Ukraine.

First quarter growth in the U.S. was weak due to lower exports, lower investment in the oil and gas sector, strikes and a harsh winter. The positive growth impulse from consumption and homebuilding should outweigh drags from net exports and energy capital spending, said Nikolic.

Evonik expects the U.S. recovery to continue in 2015 due to strong consumer spending related to improved household finances, a firm labor market, cheap oil, the housing recovery, lower fiscal drag and expansionary monetary policy. Related to this development, the Federal Reserve is expected to raise interest rates at the end of September, Nikolic said.

The question in Europe is how long support from the Central Bank will be viable. The Central Bank started Quantitative Easing in March 2015, which involves the purchase of government bonds and private sector assets, Nikolic explained. The Bank is scheduled to purchase 60 billion per month between March 2015 and September 2016 for a total 1.1 trillion, with purchases allocated according to the capital shares of national central banks in the European Central Bank.

These purchases are expected to benefit the economy by devaluing the euro, thereby boosting the exports of competitive countries in the short term. Also, a higher inflation rate is expected in the medium term. According to a Central Bank study, prices should be boosted 0.2 to 0.8 percent after 2 years, Nikolic said. The risk is that Quantitative Easing may not address the major structural factors holding back the Eurozone economy; namely, that businesses are not investing, labor markets remain inflexible and governments are slow to undertake economic reforms.

Most analysts predict that the Eurozone will show more growth momentum in 2015 than previously expected. The majority of forecasts point to higher growth in 2016. However, Nikolic explained, the Eurozone is still in a triangle of intensifying crisis situations involving the banks, growth and sovereign debt. Heres how it works:

• The banking crisis led to tighter credit, which slowed investments. Also, bank bailouts raised sovereign debt levels.
• The growth crisis led to a recession, which increased defaults. Weak growth also reduced tax revenues, placing a burden on government financing.
• The sovereign debt crisis led governments to introduce austerity measures that reduced government consumption. It also raised the likelihood that defaults would bankrupt banks with sizeable government debt holdings, especially in Spain, Italy and Greece.

China will require structural reforms to maintain sustainable growth levels, Nikolic said. The country experienced a weak first quarter, [and] disappointing activity indicators underscore continued weakness in the economy and reinforce the need for further stimulus measures.

As a result, Chinas government has intervened to support growth in the short term. For example, the Reserve Requirement Ratio was cut … from 20 to 18.5 percent, Nikolic explained. This ratio is the portion of depositors balances banks must have on hand as cash. It is determined by the countrys central bank and affects the money supply in a country. The government also cut the one-year lending rate by 25 basis points to 5.1 percent in May. Further measures are likely.

Analysts expect Chinas growth to remain at about 7 percent in 2015. Nikolic said that its export growth will be driven mainly by the U.S. while domestic demand will depend on governmental stimulus. The housing market will remain the primary drag on the economy.

Turning to Japan, Nikolic said that a weak yen, cheap oil and economic stimulus measures should support economic recovery in 2015. The first quarter of 2015 was weak compared to the same period in 2014 due to weak retail sales and sagging industrial production. Aprils Purchasing Managers Index for the country indicated a weak manufacturing sector because Japans exports depend on the U.S., China and South Korea.

In 2015, consumer spending should be boosted by cheap oil, and capital spending should be helped by a weak yen, Nikolic said. The Bank of Japan is supporting a Quantitative Easing program of 80 trillion to support growth. Therefore, Nikolic concluded, GDP growth in 2015 should recover, supported by economic stimulus measures.”