China, the second-largest oil consuming country in the world, expects to see its gross domestic product (GDP) decline to 6.3 percent (2015 forecast: 6.8 percent) and, as a result, we expect global petroleum and other liquid fuels to grow by just 1.4 million barrels per day (bpd) in 2016 and 2017, flat compared with 2015'€™s level, in line with the estimate of the US Energy Information Administration (EIA).

This is despite expected economic recovery in several oil-consuming countries, including the US. For the Organization for Economic Cooperation and Development (OECD), oil demand in 2016 is expected to increase by 0.3 million bpd, while for non-OECD countries, oil demand is expected increase by 1.1 million bpd in both 2016 and 2017 (2015 forecast: 0.8 million bpd), helped by growth in the Middle East and Eurasia.

The EIA expects OECD inventory to continue to rise in 2016 to 3.13 billion barrels, with the largest builds in the first half of 2016. In 2015, inventories rose by an estimated 1.9 million barrels, and as of Jan. 1 stood at 482.3 million barrels.

For OPEC, the EIA estimates 2016 production to increase by 0.5 million bpd, with Iran accounting for most of the increase (+0.3 million bpd). In 2016, non-OPEC production is expected to drop for the first time since 2008, with US output falling to 8.7 million bpd (2015 forecast: 9.4 million bpd). On investment, 2016 global oil and gas investment is expected to fall to US$522 billion, down 12 percent year-on-year (yoy) and 28 percent from 2014'€™s levels, adversely affecting oil output on less exploration activity.

Bahana'€™s economist believes low oil prices should also reduce prospects for other commodities. Our sector analysts expect the current low oil prices to have varied repercussions across industries (table 1). In banking, credits of about Rp 133 trillion have been distributed to oil and gas companies, which could result in higher non-performing loans (NPL).

Our sensitivity analysis suggests that for every 10 percent reduction in global oil prices, Indonesia'€™s GDP growth will drop by 10 basis points (bps). Note also that our studies reveal the need for the Indonesian government to issue Rp 532 trillion in bonds to help offset lower revenues.

At this stage of the market cycle, we have lowered our average end-2016 oil price assumption to $30 per barrel from $55 per barrel, and our 2017 assumption to $50 per barrel. Lingering uncertainties in the oil market include the pace and volume of Iranian oil entering the market, the strength of oil consumption growth, OPEC'€™s strategy and non-OPEC'€™s responses to prices. Note that Iran is reportedly able to produce oil at $1-1.50 per barrel.

On the heels of our lower oil-price assumptions, we have downgraded our sector call to '€œunderweight'€ (from '€œneutral'€). Risks to our sector call are higher-than-expected oil demand on faster-than-expected global economic recoveries.

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The writer is an analyst at Bahana Securities