Highlights

  • Crude prices firmed on the back of unscheduled supply outages in Nigeria, Ghana and Canada that exceeded 1.5 m/d by early May. This more than offset bearish sentiment in the wake of the mid-April Doha output talks. At the time of writing, crude oil prices were approaching 2016 highs: ICE Brent was $47.00/bbl. NYMEX WTI was $45.88/bbl.
  • Global oil supplies rose 250 kb/d in April to 96.2 mb/d as higher OPEC output more than offset deepening non-OPEC declines. Y-o-y world output grew by just 50 kb/d in April versus gains of more than 3.5 mb/d a year ago. 2016 non-OPEC supply is forecast to drop by 0.8 mb/d to 56.8 mb/d.
  • OPEC crude output rose by 330 kb/d in April to 32.76 mb/d as a 300 kb/d jump in Iranian flows and a boost in Iraqi and UAE supplies more than offset outages in Kuwait and Nigeria. Saudi output was steady near 10.2 mb/d. Iranian supply rose to 3.56 mb/d, a level last hit in November 2011 before sanctions were tightened.
  • Global oil demand growth for 1Q16 was revised upwards to 1.4 mb/d, led higher by strong gains in India, China and, more surprisingly, Russia. For the year as a whole, growth will be around 1.2 mb/d, with demand reaching 95.9 mb/d.
  • Stock builds are beginning to slow in the OECD; in 1Q16 they grew at their slowest rate since 4Q14 and in February they drew for the first time in a year. In March OECD commercial inventories fell by a slim 1.1 mb, with April preliminary data suggesting that stocks rebounded while oil held in floating storage rose.
  • 2Q16 global refinery throughput is forecast at 79.6 mb/d, with 0.7 mb/d y-o-y gains falling below anticipated demand growth of 1.2 mb/d. The 1Q16 estimate has been revised higher by 0.2 mb/d to 79.5 mb/d. India and Saudi Arabia are set to lead global annual increases this year.

Staying on course

Changes to the data in this month's Report confirm the direction of travel of the oil market towards balance. The net result of our changes to demand and supply data is that we expect to see global oil stocks increase by 1.3 mb/d in 1H16 followed by a dramatic reduction in 2H16 to 0.2 mb/d.

Once again, we have left unchanged our outlook for global oil demand growth in 2016 at a solid 1.2 mb/d. However, for 1Q16 revised data shows demand growing faster at 1.4 mb/d, in spite of the northern hemisphere winter being milder than usual. This strong 1Q16 performance might raise expectations that demand will remain at this stronger level causing us to raise our average figure for 2016. On the other hand, there are economic headwinds identified by the International Monetary Fund that, in April, revised down its expectations for global GDP growth in 2016 from 3.4% to 3.2% and for 2017 from 3.6% to 3.5%. In the meantime, India is the star performer: oil demand in 1Q16 was 400 kb/d higher year-on-year, representing nearly 30% of the global increase. This provides further support for the argument that India is taking over from the China as the main growth market for oil. Any changes to our current 2016 global demand outlook are now more likely to be upwards than downwards, as gasoline demand grows strongly in nearly every key market, more than offsetting weakness in middle distillates. Slower demand growth in OECD countries is not unexpected; it represents a return to the norm.

The supply side of the oil market balance always throws up surprises and in this report there are two main ones: first, wildfires in Canada have caused the shut-in of 1.2 mb/d of production capacity; and second, Iran's oil production and exports increased slightly faster than expected following the lifting of sanctions. In the case of Canada, at the time of writing we do not know how long oil production will be impacted by wild fires. For Iran, oil production in April was close to 3.6 mb/d, a level last achieved in November 2011. Even more important for global markets, oil exports reached 2 mb/d, a dramatic increase from the 1.4 mb/d seen in March. Elsewhere in OPEC, offsetting Iran's rise, there are concerns about falling production in Libya, Nigeria, where, on May 10th Shell declared force majeure on Bonny Light production, and the ability of Venezuela's oil industry to maintain operations in the face of power cuts and other shortages. The proposed economic changes in Saudi Arabia have seen the appointment of a new minister to replace the long serving Ali al-Naimi. At the forthcoming OPEC meeting on June 2nd we will see if there are any major policy changes from the Saudis with respect to supply to the oil market.

Meanwhile, non-OPEC oil production is currently more than 0.8 mb/d lower than this time last year. For 2016 as whole, we have revised our forecast for the fall in non-OPEC production from 0.7 mb/d to 0.8 mb/d.

A few years ago, shut-ins such as we have seen in Canada would have sent oil prices sharply higher. However, recently Brent crude oil prices have hovered around $45/bbl, with little reaction seen to the Canadian wildfires. General oil market sentiment seems to have improved to such an extent that Brent prices fell into short-lived backwardation in April for the first time since mid-2014, aided by expectations of heavy North Sea field maintenance. Further oil price rises, though, are likely to be limited by brimming crude oil and products stocks that will remain a feature of the market until more normal levels of inventory are reached. In this Report we note that OECD stocks grew in 1Q16 at the slowest pace since 4Q14 and in February they declined for the first time in a year. This lends support to our view that the global supply surplus of oil will shrink dramatically later this year.

In next month's Report we will publish for the first time our detailed forecast for 2017, thus providing clarity on when the oil market could reach its much-anticipated balance.