Highlights

  • Crude oil prices spiralled lower during January, with brimming stockpiles pushing global benchmarks below $30/bbl. Markets edged higher in early February on suggestions of possible discussions to coordinate a global cut in production. ICE Brent was last trading at $33.28 /bbl, while NYMEX WTI was at $30.03/bbl.
  • Having peaked, at a five-year high of 1.6 mb/d in 2015, global oil demand growth is forecast to ease back considerably in 2016, to 1.2 mb/d, pulled down by notable slowdowns in Europe, China and the US. Early elements of the projected slowdown surfaced in 4Q15.
  • Global oil supply dropped 0.2 mb/d to 96.5 mb/d in January, as higher OPEC output only partly offset lower non-OPEC production. Non-OPEC supplies slipped 0.5 mb/d from a month earlier to stand close to levels of a year ago. For 2016 as a whole, non-OPEC output is expected to decline by 0.6 mb/d, to 57.1 mb/d.
  • OPEC crude oil output rose by 280 kb/d in January to 32.63 mb/d as a sanctions-free Iran, Saudi Arabia and Iraq all turned up the taps. Supplies from the group during January stood nearly 1.7 mb/d higher year-on-year.
  • OECD commercial stocks built counter-seasonally by 7.6 mb in December to stand at 3 012 mb at month end, 350 mb above average. Refined products covered 32.3 days of forward demand, 0.1 days above end-November. Preliminary information indicates that inventories have continued building into January.
  • Global refinery runs fell by 1.3 mb/d in January to 79.8 mb/d, as the onset of seasonal maintenance in the US and weakening refinery margins curbed runs. Global throughputs nevertheless stood more than 1.7 mb/d above a year earlier, with gains particularly strong in the US and the Middle East.

False dawn?

The collapse in oil prices which characterised the first half of January looked to have halted earlier this month. On January 20th closing prices for WTI and Brent reached nadirs of $28.35/bbl and $27.88 / bbl respectively, since when Brent has moved briefly above $35/bbl and WTI has lagged a little behind. Perhaps some of the more fevered forecasts of oil prices falling to as low as $10/bbl are extreme and better days do lie ahead for oil prices. However, before victory over the bearish forces is declared we should look at the main factors driving this optimism.

Persistent speculation about a deal between OPEC and leading non-OPEC producers to cut output appears to be just that: speculation. It is OPEC's business whether or not it makes output cuts either alone or in concert with other producers but the likelihood of coordinated cuts is very low. This removes one driver of bullishness.

Another widely-held view is that OPEC production, other than Iran, will not grow as strongly in 2016 as it did in 2015. Although it is still early in the year, Iraqi output in January reached a new record and it is possible that more increases could follow. Iran has ramped up production in preparation for its emergence from nuclear sanctions and preliminary data suggests that Saudi Arabia's shipments have increased. Thus, another driver might be removed.

Another driver of bullishness is that oil demand growth will receive a boost from the collapse in oil prices to below $30/bbl. We retain our view that global oil demand growth will ease back considerably in 2016 to 1.2 mb/d - at 1.2% still a very respectable rate - but our analysis so far sees no evidence of a need to revise it upwards. Estimates by the International Monetary Fund that global GDP growth in 2016 will be 3.4% followed by 3.6% in 2017 is heavily caveated with risks to growth in Brazil, Russia and of course slower growth in China. Economic headwinds suggest that any change will likely be downwards.

A factor that helped sentiment is the recent fall in the value of the US dollar against some currencies and the perception that this reduces the cost of imported oil. Although it is widely believed that interest rate hikes in 2016 in the United States and the United Kingdom are increasingly unlikely, the dollar is still likely to remain strong as it benefits from its safe haven status with other economies faring relatively worse. Another driver removed.

The expected fall in non-OPEC output is another driver of possibly higher prices later this year. Our current assumption is that total non-OPEC output will fall by a net 600 kb/d in 2016. The number could be higher of course and many senior international oil company figures have said so but there is a lingering feeling that the big fall-off in production from US shale producers is taking an awful long time to happen. Perhaps resilience still has some way to go.

With major doubts around these five drivers of recent relative price strength we are left with our revised supply/demand balance. In this report we suggest that the surplus of supply over demand in the early part of 2016 is even greater than we said in last month’s OMR. On the assumption – perhaps optimistic - that OPEC crude production is flat at 32.7 mb/d in Q116 there is an implied stock build of 2 mb/d followed by a 1.5 mb/d build in Q216. Supply and demand data for the second half of the year suggests more stock building, this time by 0.3 mb/d. If these numbers prove to be accurate, and with the market already awash in oil, it is very hard to see how oil prices can rise significantly in the short term.  In these conditions the short term risk to the downside has increased.