Highlights

  • The outlook for global oil demand growth is largely unchanged at 1.3 mb/d in 2018 and 1.4 mb/d in 2019, as a weaker economy is largely offset by lower oil prices. OECD demand is expected to increase by 355 kb/d in 2018, slowing to 285 kb/d in 2019.
  • Oil demand is slowing in several non-OECD countries, as the impact of higher year-on-year prices is amplified by currency devaluations and slowing economic activity. Our non-OECD demand forecast has been revised down by 165 kb/d for 2019.
  • Global oil supplies are growing rapidly, as record output from Saudi Arabia, Russia and the US more than offsets declines from Iran and Venezuela. October output was up 2.6 mb/d on a year ago. Non-OPEC output will grow by 2.4 mb/d this year and 1.9 mb/d in 2019.
  • OPEC crude output rose 200 kb/d in October to 32.99 mb/d, up 240 kb/d on a year ago. Losses of 0.4 mb/d from Iran and 0.6 mb/d from Venezuela were offset by increases from others. The call on OPEC crude falls to 31.3 mb/d in 2019, 1.7 mb/d below current output.
  • After a refine products stocks build of 0.7 mb/d in 3Q18, October refining margins plunged to the lowest levels since 2014. Global refinery throughput is also likely to exceed refined product demand both in 4Q18 and into 2019.
  • OECD commercial stocks rose counter-seasonally by 12.1 mb in September to 2 875 mb. In 3Q18, stocks increased by 58.1 mb (630 kb/d), the largest gain since 2015. OECD holdings are likely to exceed the 5-year average when October data is finalised.
  • ICE Brent prices hit a four-year high of over $86/bbl at the beginning of October but have since fallen back to below $70/bbl. Brent and WTI futures curves have flipped to contango. Except for gasoline and naphtha, product prices did not match the drop in crude prices.

Heeding the warnings

In last month's Report, we noted that since the middle of the year oil supply had increased sharply, with gains in the Middle East, Russia and the United States more than compensating for falls in production in Iran, Venezuela and elsewhere. New data show that the pace has accelerated, and this higher output, in combination with Iranian sanctions waivers issued by the US and steady demand growth, implies a stock build in 4Q18 of 0.7 mb/d. Already, OECD stocks have increased for four months in a row, with products back above the five-year average. In 1H19, based on our outlook for non-OPEC production and global demand, and assuming flat OPEC production (i.e. losses from Iran/Venezuela are offset by others), the implied stock build is currently 2 mb/d.

In the August edition of this Report we described the replacement of Iranian and Venezuelan barrels as "challenging", and that there was a danger of prices rising too high too fast. Producers have heeded the warnings and more than met the challenge and today, the Big Three, Russia, Saudi Arabia and the United States, all see output at record levels. Total non-OPEC production in August, the latest month for which we have consolidated data, was 3.5 mb/d higher than a year ago, with the United States contributing an extraordinary 3.0 mb/d. Russia's crude output has hit a new record of 11.4 mb/d, with companies suggesting that they could produce even more.

In early October, the price of Brent crude oil reached a four-year high above $86/bbl, reflecting the legitimate fears of market tightness. In our view, this was a dangerous "red zone" and it justified calls for producers to raise output. Today, the price has fallen to a more reasonable level close to $70/bbl, well below where it was in May before the US announced its change of policy on Iran. Lower prices are clearly a benefit to consumers, especially hard-pressed ones in developing countries that are suffering from the additional handicap of weak national currencies. For now, forecasts of oil demand growth remain solid with an increase of 1.3 mb/d this year and an increase to 1.4 mb/d in 2019, even though the macro-economic outlook is uncertain.

We should also recognise the interests of the producers. For many countries, even though their output might have increased, prices falling too far are unwelcome. Ministers from the Vienna Agreement countries will meet in early December, but we have already seen suggestions from leading producers that supply could be cut soon if customers, seeing ample supply, rising stocks, and slumping refining margins, request lower volumes.

Although the oil market appears to be more relaxed than it was a few weeks ago, and there might be a sense of "mission accomplished" that producers have met the challenge of replacing lost barrels, such is the volatility of events that rising stocks should be welcomed as a form of insurance, rather than a threat. The United States remains committed to reducing Iranian oil exports to zero from the 1.8 mb/d seen today; there are concerns as to the stability of production in Libya, Nigeria and Venezuela; and the tanker collision last week in Norwegian waters, although modest in impact, is another reminder of the vulnerability of the system to accidents.

The response to the call by the IEA and others to increase production is a reminder that the oil industry works best when it works together. Regular contacts between key players are essential in creating understanding, and even though oil diplomacy has succeeded so far this year, it needs to be maintained to ensure market stability.