Highlights

  • Global oil demand growth is slowing at a faster pace than initially predicted. For 2016, a gain of 1.3 mb/d is expected – a downgrade of 0.1 mb/d on our previous forecast due to a more pronounced 3Q16 slowdown. Momentum eases further to 1.2 mb/d in 2017 as underlying macroeconomic conditions remain uncertain.
  • World oil supplies fell by 0.3 mb/d in August, dragged lower by non-OPEC. At 96.9 mb/d, global oil output was 0.3 mb/d below a year ago, but near-record OPEC supply just about offset steep non-OPEC declines. Non-OPEC supply is expected to return to growth in 2017 (+380 kb/d) following an anticipated 840 kb/d decline this year.
  • OPEC crude production edged up to 33.47 mb/d in August - testing record rates as Middle East producers opened the taps. Kuwait and the UAE hit their highest output ever and Iraq lifted supplies. Output from Saudi Arabia held near a record, while Iran reached a post-sanctions high. Overall OPEC supply stood 930 kb/d above a year ago.
  • The anaemic outlook for refining throughput extends further amid downward revisions to our 2H16 forecast. Refinery runs in 2016 are set to grow at the lowest rate in a decade.
  • OECD total inventories built by 32.5 mb in July to a fresh record of 3 111 mb. As refinery activities reached a summer peak, crude oil inventories refused to decline until an exceptional storm-related draw hit the US in late August.
  • Oil prices rallied in early August, rising from four-month lows near $42/bbl to briefly above $50/bbl amid peak summer demand for crude oil, which is expected to lead to the first quarterly crude stock draw in more than two years. At the time of writing, Brent futures had retreated to around $48.45/bbl while WTI was at $46.35/bbl.

WAITING GAME

When will the world oil market return to balance? That is the big question today. With the price of oil at current levels, one would expect supply to contract and demand to grow strongly. However, the opposite now seems to be happening. Demand growth is slowing and supply is rising. Consequently, stocks of oil in OECD countries are swelling to levels never seen before.

Our latest numbers provide some clues as to why. Recent pillars of demand growth China and India are wobbling. After more than a year with oil hovering around $50/bbl, the stimulus from cheaper fuel is fading. Economic worries in developing countries havent helped either. Unexpected gains in Europe have vanished, while momentum in the US has slowed dramatically.

The result has been a slump in oil demand growth from a robust 1.4 mb/d in the second quarter to a two-year low of 0.8mb/d in the third. Even with a modest weather-related uptick forecast for the end of the year, oil demand growth in 2016 will struggle to get above 1.3mb/d. Refiners are clearly losing their appetite for more crude oil. During the fourth quarter, they are expected to process only 0.1 mb/d more crude than a year ago.

The picture on the supply side is equally confounding. Despite oils collapse and resulting investment cuts, global oil production is still expanding although nowhere near the breakneck pace of 2015. High-cost non-OPEC producers have been hit particularly hard. Around 1.4 mb/d has been shut in since the end of 2014. The US the former engine of non-OPEC supply growth accounts for more than half the decline as investment cuts by independent producers have had an almost immediate impact.

However, the loss has been more than made up for by OPEC. Saudi Arabia and Iran have each raised oil output by over 1 mb/d since late 2014 when OPEC shifted strategy to defend market share rather than price. Saudi Arabias vigorous production has allowed it to overtake the US and become the worlds largest oil producer. Indeed, OPECs low-cost Middle East producers - Saudi Arabia, Kuwait, the UAE and Iraq - are all at or near all-time highs, while Irans post-sanctions ramp up has been swift.

Our forecast in this months Report suggests that this supply-demand dynamic may not change significantly in the coming months. As a result, supply will continue to outpace demand at least through the first half of next year. Global inventories will continue to grow: OECD stockpiles in July smashed through the 3.1 billion barrel wall. As for the markets return to balance - it looks like we may have to wait a while longer.