Highlights

  • Global oil supply rose by 720 kb/d in June to 97.46 mb/d as producers opened the taps. Output stood 1.2 mb/d above a year ago with non-OPEC firmly back in growth mode. Non-OPEC production is expected to expand by 0.7 mb/d in 2017 and 1.4 mb/d in 2018.
  • OPEC crude output rose by 340 kb/d in June to 32.6 mb/d after Saudi flows increased and Libya and Nigeria, spared from cuts, pumped at stronger rates. OPEC compliance slumped to 78%, the lowest rate this year, and was overtaken by the non-OPEC group whose rate improved to 82%.
  • For global demand, after lacklustre 1.0 mb/d growth in 1Q17, there was a dramatic acceleration in 2Q17 to 1.5 mb/d. For 2017 as a whole, demand is forecast to reach 98.0 mb/d, with growth revised up by 0.1 mb/d compared to last month's Report to 1.4 mb/d. Further growth of 1.4 mb/d is foreseen for 2018, with global demand reaching 99.4 mb/d.
  • OECD industry stocks fell in May by 6 mb on lower imports of crude and products. Stocks are now 266 mb above the five-year average, down from 300 mb in April. Preliminary data show a moderate reduction in OECD stocks for June.
  • Benchmark crude oil prices fell by $3-4/bbl on average in June and remain close to their level when the OPEC output deal was announced. Sour crudes such as Dubai, Maya and Urals were all boosted by tight supplies.
  • Global refinery throughput is forecast to reach a record high of 81 mb/d in 3Q17, up 0.8 mb/d from 2Q17 levels.  The US contributes half of the 3Q17 build. Refinery runs will decline seasonally by 1.5 mb/d from the peak August level to October.

Waning confidence

Oil investors are going through a period of waning confidence with prices recently returning to levels not seen since early November. Brent prices have closed below $50/bbl each day since early June and few investors expect a recovery anytime soon. Money managers slashed net long positions in Brent and WTI crude futures by more than 200 mb between end-May and end-June, to 312 mb. This was the lowest net long position recorded since January 2016 and June was the fourth straight month of falls in net long positions since a record bullish position was achieved in February in the euphoria following the output agreements. The widespread interpretation of this is that investors believe, perhaps impatiently, that oil market re-balancing is taking too long with some calling for additional action by producers to speed up the process.

Each month something seems to come along to raise doubts about the pace of the re-balancing process. This month, there are two hitches: a dramatic recovery in oil production from Libya and Nigeria and a lower rate of compliance by OPEC with its own output agreement.

In the past few months, Libya and Nigeria have seen their combined output increase by more than 700 kb/d. For fellow OPEC members, who agreed to reduce production by 1.2 mb/d, to see their cut effectively diluted by nearly two-thirds must be very frustrating, especially as their pact has, hitherto, been well observed by historical standards.

The second internal issue for OPEC is that its rate of compliance now appears to be slipping. Data is subject to revision, but our current view is that compliance slipped to 78% in June from 95% in May. While the top producer, Saudi Arabia, continues to deliver on its promise to cut output, several other producers have not so far fulfilled their commitments. However, the output agreement runs until March 2018, and success is judged over the whole period rather than in one month. It is OPEC's business to manage its output and we must wait and see if the changing supply picture from the group as a whole forces an adjustment to the current arrangements. In passing, it is worth noting that compliance from the ten non-OPEC producers who volunteered to cut production improved to 82% in June, higher than the rate achieved by OPEC.

The recent price weakness may lead the US shale patch to reassess its prospects. Financial data suggests that while output might be gushing, profits are not and recent press reports quoted leading company executives saying that oil prices need to be around $50/bbl to maintain production growth. WTI values have not been consistently above that level since late April. Meanwhile, we saw a record twenty-three consecutive weeks of rising drilling activity grind to a halt, although modest growth has resumed. Such is the resilience of the US shale sector that we should be careful to pronounce that its expansion will slow, however it could be that the recent exuberance is being reined in. For now, we have left unchanged our view on US production and, for that matter, on the prospects for non-OPEC production as a whole.

Meanwhile, preliminary indications suggest that global demand growth, after falling to a three-year low of 1.0 mb/d in 1Q17, rebounded to 1.5 mb/d in 2Q17, with strong year-on-year data for the OECD countries as well as in developing economies. Taking demand and supply together, the current market balance implies a global stock draw of 0.7 mb/d in 2Q17. For now, actual stocks numbers do not support this picture but, at the time of writing, data for the quarter remains incomplete and, in any event, numbers for previous months can be revised. Thus, we need to wait a little longer to confirm if the process of re-balancing has actually started in 2Q17 and if the waning confidence shown by investors is justified or not.