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Highlights

  • Crude oil prices fell sharply during July and into early August, pressured by an abundance of supply and a strong US dollar. By early August, global benchmarks had sunk around 25% below end June levels. At the time of writing, ICE Brent was trading at around $49 /bbl while NYMEX WTI was at $43.30/bbl.
  • Global oil demand in 2015 is expected to grow by 1.6 mb/d, up 0.2 mb/d from our previous Report and the fastest pace in five years, as economic growth solidifies and consumers respond to lower oil prices. Persistent macro-economic strength supports above-trend growth of 1.4 mb/d in 2016.
  • World oil supply fell nearly 0.6 mb/d in July, mainly on lower non-OPEC output. OPEC crude production held steady near a three-year high. As lower prices and spending cuts take a toll, non-OPEC supply growth is expected to slow sharply from a 2014 record of 2.4 mb/d to 1.1 mb/d this year and then contract by 200 kb/d in 2016.
  • OPEC crude supply inched 15 kb/d lower in July to 31.79 mb/d as Saudi output eased and offset record high Iraqi production and increased Iranian flows. The 'call on OPEC crude and stock change' rises to 30.8 mb/d in 2016, up 1.4 mb/d on this year due to a stronger demand outlook and stalling non-OPEC supply growth.
  • OECD inventories rose counter-seasonally by 9.9 mb to hit another all-time high of 2 916 mb in June with their surplus to average levels widening to a record 210 mb. As the seasonal restocking of 'other products' continued apace, refined products by end-month covered 31.3 mb days of forward demand, 0.2 days above end-May.
  • Global refinery runs reached a record 80.6 mb/d in July, 3.2 mb/d up on a year earlier, but fissures are showing. High distillate stocks have pushed cracks in Singapore down to their lowest level since 2009 and prompted run cuts in Asia. Elsewhere, especially in the US, still-soaring gasoline cracks supported high margins and throughput.

Long and winding road

From the driller in the Bakken to the motorist at the pump, oil market players are adjusting to a world of lower prices. Our latest forecast shows stronger-than-anticipated demand and non-OPEC supply growth swinging into contraction next year. While a rebalancing has clearly begun, the process is likely to be prolonged as a supply overhang is expected to persist through 2016 - suggesting global inventories will pile up further.

Oil's plunge below $50/bbl from triple digits a year ago has seen demand react more swiftly than supply. As a result, the world is now expected to use 1.6 mb/d more fuel in 2015 than the previous year as economic growth consolidates and consumers burn more oil. That's the biggest growth spurt in five years and a dramatic uptick on a demand increase of just 0.7 mb/d in 2014.



On the other side of the equation, global supply continues to grow at a breakneck pace - currently running 2.7 mb/d above a year earlier - despite a collapse in oil prices. Muscular pumping from OPEC's top producers Saudi Arabia and Iraq has boosted the group's flows to 31.8 mb/d - the highest in three years. Since the Riyadh-led OPEC decision last November to defend market share rather than price, output from the 12-member group has soared by 1.4 mb/d and it looks as if there is no backing down.

But OPEC only accounts for a bit more than half of the annual increase in world oil supply. While non-OPEC output growth has sunk from its heights of 2014, supply in July was still running 1.2 mb/d on a year earlier thanks to hefty investment made previously. Oil's second lurch below $50/bbl has prompted major oil companies and independents alike to revisit investment plans and take an axe to them. While a drop in costs and efficiency improvements will help to offset some of the spending cuts, output is likely to take a hit soon. As such, non-OPEC supply growth is expected to decelerate through the end of the year and decline in 2016 - with the US hardest hit.

Even with the slowdown in non-OPEC production and higher demand growth, a sizeable surplus remains. Our latest balances show that while the overhang will ease from a staggering 3.0 mb/d in 2Q15, its highest since 1998, the projected oversupply persists through 1H16. Assuming OPEC production continues at around 31.7 mb/d (its recent three-month average) through 2016, 2H15 sees supply exceeding demand by 1.4 mb/d, testing storage limits worldwide. The surplus drains down to about 850 kb/d in 2016, with 4Q16 marking the first quarter of a potential stock draw. This outlook does not include potentially higher Iranian output in the case of sanctions being lifted.

Against this backdrop, many participants in the oil industry have adopted a new mantra - "lower for longer''. But how low and how long? While reduced capital spending will help rebalance the market in the short term, it will no doubt also lead to lower future supply growth. This will become increasingly sensitive if demand continues above-trend, as it has so far in 2015.