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  • Oil prices sank to six-year lows in August as a supply overhang grew and concern deepened over the health of the global economy, especially in China. After rebounding on a slew of economic and fundamental data, prices turned volatile in September. Brent was last trading at $48.10/bbl with NYMEX WTI at $45.20/bbl.
  • Oil's latest tumble is expected to cut non-OPEC supply in 2016 by nearly 0.5 mb/d - the biggest decline in more than two decades. Lower output in the US, Russia and North Sea is expected to drop overall non-OPEC production to 57.7 mb/d. US light tight oil, the driver of US growth, is forecast to shrink by 0.4 mb/d next year.
  • OPEC crude supply fell by 220 kb/d in August to 31.57 mb/d, led by losses in Saudi Arabia, Iraq and Angola. The group's output stood 1.2 mb/d higher than a year ago. The 'call' on OPEC climbs to 31.3 mb/d in 2016, up 1.6 mb/d y-o-y as lower prices dent non-OPEC supply and support above-trend demand growth.
  • Global oil demand growth is expected to climb to a five-year high of 1.7 mb/d in 2015, before moderating to a still above-trend 1.4 mb/d in 2016 thanks to lower oil prices and a strengthening macroeconomic backdrop.
  • OECD oil inventories swelled by a further 18 mb in July to a record 2 923 mb. Robust refinery throughput pushed crude stocks 9.9 mb lower, while refined products added 26.7 mb. At end-July, product stocks covered 31.2 days of forward demand, 0.6 days above end-June. Preliminary data suggest further builds in August.
  • Global refinery throughput reached a seasonal peak of 80.9 mb/d in August before autumn turnarounds cut runs through October. Refinery margins remained robust through early September, but with support shifting from gasoline to middle distillates as refiners gear up for the heating season.

In a word: supply

The big story this month is one of tightening supply, with the spotlight firmly fixed on non-OPEC. Oil's price collapse is closing down high-cost production from Eagle Ford in Texas to Russia and the North Sea, which may result in the loss next year of half a million barrels a day - the biggest decline in 24 years. While oil's recent volatility has been unnerving - Brent crude jolted from a six-year low below $43 /bbl to above $50/bbl in the space of days - the lower price environment is forcing the market to behave as it should by shutting in output and coaxing demand.

US oil production is likely to bear the brunt of an oil price decline that has already wiped half the value off Brent. After expanding by a record 1.7 mb/d in 2014, the latest price rout could stop US growth in its tracks. A sharp decline is already underway, with annual gains shrinking from more than 1 mb/d at the start of 2015 to roughly half that level by July. Rigorous analysis of our data suggests that US light tight oil supply, the engine of US production growth, could sink by nearly 400 kb/d next year as oil's rout extends a slump in drilling and completion rates.

Producers outside of the US also continue to adjust to the lower price outlook. Marginal fields are being shut or are at risk as companies seek to stem losses from high operating costs. Spending curbs are also accelerating decline rates. The sizeable anticipated loss of overall non-OPEC output and robust demand growth suggest that unless prices recover, lower-cost OPEC producers would need to turn up the taps during the second half of 2016 to keep the market in balance. Our forecast shows the 'call' on OPEC for 2H16 leaping to an average 32 mb/d - a level last pumped seven years ago. The group produced 31.6 mb/d during August.

But until then, inventories are continuing to build with global supply - towering 2.4 mb/d above a year ago - outpacing demand. Our balances show the world only starting to siphon off record-high stocks in the second half of 2016. At that point Iran could be producing more oil, provided sanctions are lifted following implementation of the nuclear pact it secured with the P5+1 group.

As for demand, the lure of $50/bbl oil is boosting growth to a five-year high of 1.7 mb/d this year and an above-trend 1.4 mb/d in 2016. US motorists are taking to the roads, propelling domestic gasoline demand to an eight-year high. We expect China, the world's second largest oil consumer, to keep up its crude purchases despite the recent stock market collapse, currency devaluation and steady stream of negative macroeconomic news. Beijing could also buy extra crude to fill up its strategic reserves.

Of course, it is not just non-OPEC that is taking a hit from lower oil prices. High-cost projects are also at risk in OPEC nations. The 12-member group meanwhile continues to pump vigorously, with Saudi Arabia, Iraq and the UAE producing at or near record rates. On the face of it, the Saudi-led OPEC strategy to defend market share regardless of price appears to be having the intended effect of driving out costly, "inefficient" production.