Commentary: Looking for balance in the oil market
There is more than one way to look at oil-market balances. The IEA uses a straightforward approach: supply minus demand, which we report in the monthly Oil Market Report as “Total stock changes and Miscellaneous.” Part of the calculation can be easily explained by changes in OECD stocks, floating storage and oil in transit. The remaining “miscellaneous to balance” is less clear. This element, which implies unreported non-OECD stock changes, has come under scrutiny recently particularly as Chinese crude-oil balances have risen to unprecedented levels.
The following commentary expands on the analysis we provided in the September issue of the Oil Market Report, where we took a close look at our “miscellaneous to balance” and drew a distinction between crude oil and product balances to have a clearer view of oil market developments.
The world oil market appears to have returned to balance this year, thanks to a substantial stock draw in the second quarter. As global demand exceeded supply, our balances in 2Q17 implied a 0.9 million barrels a day (mb/d) decline in inventories, the first draw since 4Q13. Somewhat counter-intuitively, the price of Brent was $4/bbl below the first quarter.
In 2Q17, refined product markets drew nearly 1 mb/d of stocks, as refining activity lagged demand growth. The OECD refined product stocks drew by 0.3 mb/d, implying a 0.6 mb/d draw from non-OECD countries. There is no comprehensive non-OECD stocks data to confirm this, however non-OECD total demand grew by 1.1 mb/d year-on-year in 2Q17 while refining throughput was flat. A 0.6 mb/d draw was close to the 0.5 mb/d implied build in 1Q17, so the stock draw would have been technically possible.
Forecasts of refinery runs and demand for 3Q17 and 4Q17 imply continued refined product stock draws. Even in 3Q17, when global headline oil balances show an oversupply of 0.4 mb/d, refined products are forecast to draw by a counter-seasonal 0.4 mb/d, in part due to the hurricane outages in the US Gulf Coast. The draw accelerates in 4Q17 and is double the size of our headline total oil balances.
|Refined product balance||2015||1Q16||2Q16||3Q16||4Q16||2016||1Q17||2Q17||3Q17||4Q17||2017|
|OECD refined product actual stock change||0.3||0.4||-0.3||0.0||-0.1||0.0||0.1||-0.3|
|Non-OECD refined product implied stock change||0.3||0.3||0.0||0.1||0.1||0.1||0.5||-0.6|
*Excludes non-refined products such as natural gas liquids from fractionation plants, biofuels, direct use of crude, liquids from coal and gas.
Unlike crude oil stocks, when refined products draw on stocks, crude oil prices may not necessarily show an immediate reaction. Refined product stocks decrease precisely because refiners do not purchase and consume enough crude to meet all of the product demand. Thus, crude oil demand is subdued, and prices need to be supported by supply-side incentives to move higher.
What about crude oil markets? In analysing the crude-oil balance, it makes sense to look at a rolling average for two quarters to remove refinery maintenance-related seasonal swings. Crude oil has been significantly oversupplied in the last three years. Despite supply cuts from OPEC and some non-OPEC participants, 2017 as a whole still sees an oversupplied market as refining demand is relatively subdued, assuming OPEC production remains flat from August through end-year.
|Crude oil balance||2015||1Q16||2Q16||3Q16||4Q16||2016||1Q17||2Q17||3Q17||4Q17||2017|
|Refining throughput + direct use||80.5||80.8||80.1||81.5||81.1||80.9||81.2||81.5||81.7||81.9||81.6|
|Crude and condensate supply||81.6||82.0||80.6||81.4||82.9||81.7||81.5||81.2||82.2||82.6||81.9|
|Crude oil balance||1.1||1.2||0.5||-0.1||1.8||0.8||0.3||-0.2||0.5||0.7||0.3|
|Crude oil balance ex-China implied balance||0.9||0.6||-0.2||-0.8||1.6||0.2||-0.5||-1.5|
|OECD crude oil stock change||0.4||0.3||0.1||-0.3||0.0||0.0||0.5||-0.7|
|Non-OECD implied crude oil stock change||0.7||0.9||0.4||0.2||1.8||0.8||-0.2||0.4|
|China crude oil balance||0.3||0.6||0.6||0.7||0.1||0.6||0.8||1.3|
*Mathematically, this includes also oil in transit and floating storage.
Since 2015, most of the excess crude oil has found a home in China. The Chinese crude-oil balance shows an oversupply of 0.6 mb/d in 2016 and 1 mb/d in 1H17, slightly higher than the global crude oil oversupply of the past six quarters. China has accelerated oil infrastructure construction, so some of this excess has been used to fill pipelines, and as working inventory at ports and refinery sites. But some of this stock build could be under-reported refinery throughput or direct use in petrochemical facilities. Neither could be large enough to explain away the Chinese balances. Most of the additional oil is likely to have built up in Chinese strategic petroleum reserves or in commercial inventories.
If Chinese implied stockbuilds are excluded from our global balances, the extent of oversupply goes down in 2015-2016. In 1H17, the crude-oil market is nearly balanced. As OECD crude stocks at the end of June were unchanged from December, and Chinese balances amounted to 0.9 mb/d, this means that elsewhere in the non-OECD crude inventories must have drawn 0.9 mb/d, or some 160 million barrels.
Based on our analysis of JODI-reported stock data, and the movement in floating storage and oil in transit, we can identify about 100 million barrels of stock draws in the first half of this year, equivalent to 0.5 mb/d. However, many crude-producing countries that account for almost half the world’s crude supply do not report stocks data that would allow us to calculate actual 2017 draws. The remaining 0.4 mb/d of implied crude stock draw in 1H17 could have come from these countries, especially since some were involved in output cuts and would have tried to sustain market share by keeping up exports.
Therefore, China effectively acted as a price setter from 3Q15 to 1Q17, when it stored away much of the global oil overhang. That may change now that Chinese buying is actually drawing down stocks elsewhere. Our 2H17 crude oil balance shows a 0.6 mb/d build. If China continues to buy big volumes, there is still some cushion in the global market. The key question is whether China will want to purchase even more oil, causing continued stock draws in the OECD and other non-OECD countries.
In our view, the Chinese crude balance is price dependent. While it obviously contributed to the market equilibrium, it would be illogical for us to incorporate an assumption of Chinese implied stock builds in our forward-looking balances.
Analysing today’s oil markets is as fascinating as ever. The growing role of non-OECD countries highlights yet again the need to have access to more transparent and timely data. The IEA is leading these efforts by continually working with its partners from emerging countries to improve energy data and bring greater transparency to all. At the same time, the IEA appreciates there are different ways to analyse the state of the oil market and healthy debate about these approaches is very welcome.