Highlights

  • Crude oil prices rallied to a four-month high in mid-April as further evidence emerged of accelerating declines in US output, while market participants held out hope that upcoming producer talks would agree a deal to help manage a still massive supply overhang. At the time of writing, Brent was at $44.30/bbl and US WTI was at $41.75/bbl.
  • Growth in global oil demand will ease to around 1.2 mb/d in 2016, below 2015's 1.8 mb/d expansion, as notable decelerations take hold across China, the US and much of Europe. Preliminary 1Q16 data reveal this is already occurring, with year-on-year growth down to +1.2 mb/d, after gains of +1.4 mb/d in 4Q15 and +2.3 mb/d in 3Q15.
  • OPEC crude oil production fell by 90 kb/d in March to 32.47 mb/d as ongoing outages in Nigeria, the UAE and Iraq more than offset a further increase from Iran and higher flows from Angola. Supply from Saudi Arabia dipped in March but held near 10.2 mb/d.
  • Global oil supplies sank by 0.3 mb/d in March to 96.1 mb/d, with annual gains shrinking to 0.2 mb/d, from 1.7 mb/d a month earlier and 2.7 mb/d in 2015. The outlook for non-OPEC production in 2016 is largely unchanged since last month's Report, at 57.0 mb/d, 710 kb/d less than the 2015 average.
  • 1Q16 global refinery runs are estimated 79.3 mb/d, 1.2 mb/d up year on year (y-o-y), in line with global demand growth. The forecast for 2Q16 throughput is at 79.7 mb/d, up only 0.8 mb/d y-o-y, slower than forecast 1.1 mb/d demand growth. All of the net growth in the first half of 2016 comes from non-OECD refiners.
  • Commercial stocks in the OECD built counter-seasonally by 7.3 mb in February to end the month at 3 060 mb. Accordingly, the overhang of inventories against average levels widened to 387 mb at end-month. Preliminary information for March suggest OECD holdings rose further while volumes of crude held in floating storage increased.  

Market balance draws near

For some months now in this Report we have anticipated steady oil demand growth and falling non-OPEC supply. This scenario is now taking shape and the oil market looks set to move close to balance in the second half of this year. Oil prices are on the rise with Brent crude oil trading currently well above $40/bbl.

Part of the recent support for prices arises from expectations of the meeting of leading oil producers scheduled to take place on Doha, Qatar, on 17 April. We cannot know the outcome but if there is to be a production freeze, rather than a cut, the impact on physical oil supplies will be limited. The publication date of this Report falls just ahead of the meeting and, accordingly, we have made no changes to our supply assumptions.

The latest rather downbeat global economic outlook from the International Monetary Fund might affect market sentiment but we have not made changes to our demand numbers. We remained confident that in 2016 global oil demand will grow by 1.2 mb/d. In the meantime, India could be replacing China as the main engine of global demand growth. Revised data for late 2015 and early data for 2016 shows year-on-year (y-o-y) growth of approximately 8%. For 2016 as a whole, India will see growth of around 300 kb/d - the strongest ever volume increase. Reforms to the rules allowing refiners to directly import crude oil are all part of a general trend towards liberalisation that should underpin India's growth momentum.

For now though, the main focus is on the supply side of the balance and our view held since the beginning of 2016 of forecast of a fall in non-OPEC supply in 2016 of 700 kb/d looks to be spot-on. In March the year-on-year fall was estimated at 690 kb/d, and, in particular, there are signs that the much-anticipated slide in production of light, tight, oil in the United States is gathering pace. By early April the rig count had fallen nearly 80% from the peak seen in October 2014 and more anecdotal evidence is emerging of financial problems taking their toll on the shale pioneers. Within the group of non-OPEC producers there are few areas of growth with only a handful of countries likely to increase production this year, unless Russia, which has surprised us all with continued growth in production, does not carry out its professed support for a production freeze. Within the ranks of OPEC's members, the pace of Iran's return to the market is more measured than some expected but production in March was still nearly 400 kb/d higher than at the start of the year, in line with our forecast. While nuclear sanctions have been lifted, some financial sanctions remain in place and the financing of Iran's crude oil trade is not always straightforward. Nor is access to markets, as shown for example by reports of marketing difficulties for Iran's condensates stocks.

For the time being, based on a conservative scenario for OPEC crude oil production of 32.8 mb/d in 2Q16 and 33.0 mb/d in both 3Q and 4Q, our outlook suggests that after big build-up of stocks in the first half of 2016 of 1.5 mb/d the surplus will fall to 0.2 mb/d in both 3Q and 4Q. A tighter market outlook seems to be supported in at least part of the pricing structure: the ICE Brent contango nearly vanished in early April after holding steady at a discount of $0.65/bbl during February and March. The prompt month contract is flirting with backwardation, partly on the back of summer maintenance plans in the North Sea, but also due to the general feeling of impending market tightness. Our demand and supply numbers are, of course, highly provisional: even if they turn out to be too bullish, there is no doubt as to the direction of travel for the supply/demand balance. As always, the data will change. It is inevitable that in a 96 mb/d market it will be impossible to account for every barrel that we believe has been produced, especially in times of major supply surplus such as we have today. These "missing" barrels may eventually be re-allocated to revised supply and/or demand or to physical stocks, but in the meantime we must accept that data uncertainty is a fact of life.

In the June edition of this Report we will publish our detailed forecast for 2017. This will provide greater clarity as to when in the year will come the market re-balancing.