OMR: Half time
13 April 2017
It is now half time for the six-month oil production cuts agreed by OPEC and eleven non-OPEC countries. So far, the game has gone fairly well for producers. Prices have stabilised again recently after falling by about ten percent in early March, with recent unplanned outages and rising political tension in the Middle East playing a role. For OPEC countries, compliance has been impressive from the start while non-OPEC participants are gradually increasing their compliance rate, although in their case it is harder for analysts to verify the data.
Even at this mid-way point, we can consider what comes next. It is of course OPEC’s business to decide on its output levels, but a consequence of (hypothetically) extending their output cuts beyond the six-month mark would be bigger implied stock draws. This would provide further support to prices, which in turn would offer further encouragement to the US shale oil sector and other producers.
Indeed, although the oil market will likely tighten throughout the year, overall non-OPEC production, not just in the US, will soon be on the rise again. Even after taking into account production cut pledges from the eleven non-OPEC countries, unplanned outages in Canada as well as in the North Sea, we expect production will grow again on a year-on-year basis by May. For the full year, we see growth of 485 kb/d, compared to a decline of 790 kb/d in 2016. The main impetus comes from the US where monthly data shows that output reached 9.0 mb/d in March, up from a trough of 8.6 mb/d in September 2016. We now expect that US production will be 680 kb/d higher at the end of the year than it was at the end of 2016, an upgrade to our previous forecast.
Another factor that could influence the market balance is revised demand growth. We have cut our growth number for 1Q17 by 0.2 mb/d to 1.1 mb/d. New data shows weaker-than-expected growth in a number of countries including Russia, India, several Middle Eastern countries, Korea and the US, where demand has stalled in recent months. After upgrading demand estimates for 2Q17 and cutting it for the second half of the year, we are left with growth for 2017 at 1.3 mb/d rather than the 1.4 mb/d previously forecast.
Looking at observed stocks versus the implied gap between demand and supply; new OECD stocks data for February shows that, set against the conventional measure of the five-year average, they remain about 330 mb above this level. OECD stocks, particularly products, drew by 0.8 mb/d in 4Q16, but we estimate that in 1Q17 they increased by 0.4 mb/d, mainly for crude oil and, in turn mainly in Europe and the US. Outside of the OECD, in the Stocks section of this Report we show that a group of stock centers, including Saldanha Bay, the Caribbean and floating storage have, provisionally, seen stocks fall by 0.3 mb/d in 1Q17. The net result is that global stocks might have marginally increased in 1Q17 versus an implied draw of about 0.2 mb/d. It can be argued confidently that the market is already very close to balance, and as more data becomes available this will become clearer. We have an interesting second half to come.