Highlights

  • Recent weaknesses in demand growth are likely to prove transitory, particularly in post currency-reform India. Although global growth was only 0.9 mb/d in 1Q17, it accelerates in 2H17 and for the year as a whole our outlook remains unchanged at 1.3 mb/d. In 2018, growth increases modestly to 1.4 mb/d as demand reaches a record 99.3 mb/d.
  • Global oil supply rose by 585 kb/d in May to 96.69 mb/d as both OPEC and non-OPEC countries produced more. Output stood 1.25 mb/d above a year ago, the highest annual increase since February 2016. Gains were dominated by non-OPEC, particularly the US.
  • OPEC crude output rose by 290 kb/d in May to 32.08 mb/d, the highest level so far this year, after comebacks in Libya and Nigeria, which are exempt from supply cuts. Output from members bound by the production deal edged lower, which kept year-to-date compliance strong at 96%.
  • OECD commercial stocks rose in April by 18.6 mb (620 kb/d) on higher refinery output and imports. They stand 292 mb above the five-year average and are higher than when OPEC decided to cut output. For May, preliminary data suggests stocks falling in Fujairah, Japan, Europe, Singapore and in vessels offshore, but rising in the US and China.
  • Benchmark crude oil prices fell after 23 May, reflecting lower expectations about the pace of global market rebalancing. At publication time, crude prices are close to the levels when the OPEC output deal was announced. Fuel oil prices and cracks were boosted as stocks fell to their lowest level in two years due to tight supplies of sour crudes. Gasoline and naphtha prices fell.
  • Record high US refinery throughput in April and May led to upward revisions to our 2Q17 and 3Q17 forecasts. Global refinery intake is projected to reach 80 mb/d in 2Q17 and 81.3 mb/d in 3Q17, up by about 1.1 mb/d y-o-y in each quarter. In 3Q17, throughput growth is driven by the US and China in the East.

Whatever it takes

In this Report, we publish our first look at what 2018 might have in store. This is timely in view of the recent extension until March of the output cuts. However, such is the volatile nature of the market today, with recent tensions in the Gulf adding to the mix, 2018 seems a long way away. Immediate concerns about stubbornly high stocks due to rising global production are pressuring oil prices, which have fallen to levels not seen since the OPEC ministerial meeting at the end of November.

In April, total OECD stocks increased by more than the seasonal norm. For the year-to-date, they have actually grown by 360 kb/d. Our provisional monthly data for May suggests that OECD stocks might, overall, be little changed, but recent US weekly data suggests that rising domestic production, high imports, low exports, and weaker gasoline demand, have combined to send stocks there higher. In last month's Report, the implied market deficit in 2Q17 was 0.7 mb/d but now this has narrowed to 0.5 mb/d. The reasons for this are a reduction in demand growth, mainly because of weaker Chinese and European data, and an increase in global supply. Based on our current numbers, assuming stable OPEC production, market deficits should be significant in 2H17, although adverse changes to demand and supply data can erode prospective stock draws.

In the meantime, as always these days, the focus is on US production, which, as anticipated in our earlier forecasts, is rising strongly. For 2017, we expect US crude supply to grow by 430 kb/d and the year will end with production there 920 kb/d higher than at the end of 2016. Our first look at 2018 suggests that US crude production will grow year-on-year by 780 kb/d, but such is the dynamism of this extraordinary, very diverse industry it is possible that growth will be faster. For total non-OPEC production, we expect production to grow by 0.7 mb/d this year but our first outlook for 2018 makes sobering reading for those producers looking to restrain supply. In 2018, we expect non-OPEC production to grow by 1.5 mb/d, which is slightly more than the expected increase in global demand.

Back to today; while OPEC countries collectively have broadly implemented their cuts, some members have been less than wholly diligent. Iraq has achieved a compliance rate of only 55% so far this year, and Venezuela and the UAE are also laggards. Meanwhile, two OPEC members not included in the deal have recently seen increases in production: Libya's output has reached nearly 800 kb/d, a level not seen since 2014, and Nigeria has announced the lifting of force majeure for Forcados exports, potentially making available to the market more than 200 kb/d. By the nature of these two countries, production could easily fall back; indeed, in Nigeria the very recent announcement of force majeure for Bonny Light liftings is an example. However, if Libya and Nigeria continue to grow their output these extra barrels dilute the value of OPEC's output accord and contribute to delaying the re-balancing of the market.

The currency used to express re-balancing is the five-year average level of oil stocks. In this report, we show that OECD stocks are currently 292 mb above this level. Indeed, based on our current outlook for 2017 and 2018, incorporating the scenario that OPEC countries continue to comply with their output agreement, stocks might not fall to the desired level until close to the expiry of the agreement in March 2018. A lot can change of course, but, as we said at the start, 2018 seems a very long way away.

We have regularly counselled that patience is required on the part of those looking for the re-balancing of the oil market, and new data leads us to repeat the message in this Report. "Whatever it takes" might be the mantra, but the current form of "whatever" is not having as quick an impact as expected.