- Global oil demand growth estimates for 2018 and 2019 are unchanged at 1.4 mb/d and 1.5 mb/d, respectively. The pace of growth slowed sharply in 2Q18, caused by weaker OECD Europe and Asia demand. US gasoline demand growth eased due to higher prices.
- Non-OECD demand remains resilient but there is a risk to the 2019 outlook from currency depreciation and trade disputes. Demand in China and India combined will grow by 910 kb/d in 2018, but the pace slows to 640 kb/d in 2019.
- Global supply in August reached a record 100 mb/d as higher output from OPEC offset seasonal declines from non-OPEC. Nevertheless, non-OPEC supply was up 2.6 mb/d y-o-y, led by the US. Non-OPEC production will grow by 2 mb/d in 2018 and 1.8 mb/d in 2019.
- OPEC crude supply rose to a nine-month high of 32.63 mb/d in August. A rebound in Libya, near record Iraqi output and higher volumes from Nigeria and Saudi Arabia outweighed a substantial reduction in Iran and a further fall in Venezuela.
- From August's record rate of 83.5 mb/d, global crude runs decline due to maintenance before surging in December to another record high of 84.5 mb/d. US refining is booming with runs almost reaching 18 mb/d in August, while Latin American activity continues to fall.
- OECD commercial stocks rose 7.9 mb in July to 2 824 mb, only the fourth monthly increase in the last year. Stocks have been stable in a narrow range since March. Preliminary data for August point to significant inventory builds in Japan and the US, and a fall in Europe.
- ICE Brent prices fell in August but recently have climbed to two-month highs near $80/bbl. Both ICE Brent and NYMEX WTI futures curves are backwardated. The Brent/WTI differential has widened by $5/bbl since early August due to relatively weaker US prices.
Tightening up on the way
Since the previous edition of this Report, the price of Brent crude oil fell close to $70/bbl and is now flirting with $80/bbl. Two reasons for the swing are that Venezuela's production decline continues, and we are approaching 4 November when US sanctions against Iran's oil exports are implemented. In Venezuela, production fell in August to 1.24 mb/d and, if the recent rate of decline continues, it could be only 1 mb/d at the end of the year. Evidence provided by tanker tracking data suggests that Iran's exports have already fallen significantly but we must wait to see if the 500 kb/d of reductions seen so far will grow. (See Iran supply tumbles as buyers take heed of US sanctions).
If Venezuelan and Iranian exports do continue to fall, markets could tighten and oil prices could rise without offsetting production increases from elsewhere. Supply from some countries has grown since the Vienna meetings in June: last month Saudi Arabia and Iraq combined saw output increase by 160 kb/d. In Iraq's case, exports have grown to such an extent that they are greater than Iran's production, and there is still about 200 kb/d of shut-in capacity in the north of the country due to the ongoing dispute with the Kurdistan Regional Government. Based on our August estimates of production, OPEC countries are sitting on about 2.7 mb/d of spare production capacity, 60% of which is in Saudi Arabia. But the point about spare capacity is that, having been idle, it is not clear exactly how much, beyond what is widely thought to be "easy" to bring online, will be available to coincide with further falls in Venezuelan exports and a maximisation of Iranian sanctions. It is not just a question of volume; refiners used to processing Venezuelan or Iranian crude will compete to find similar quality barrels to maintain optimal refinery operations. Alternative supplies of lighter crude might not be ideal for this reason. Even before we factor in any further fall in exports from Venezuela or Iran, record global refinery runs are expected to result in a crude stock draw of 0.5 mb/d in 4Q18. Any draw will be from a basis of relative tightness: in the OECD, stocks at end-July were 50 million barrels below the five-year average.
If we are looking for additional barrels from elsewhere to help compensate for further export declines from Venezuela and Iran the picture is mixed. Brazil was supposed to be one of the big production success stories of 2018, but various problems have stymied growth to the extent that output will rise by only 30 kb/d this year versus a first estimate of 260 kb/d. On the upside, the United States continues to show stellar performance with total liquids output expected to grow by 1.7 mb/d this year and another 1.2 mb/d in 2019. However, companies are not adjusting their production plans, despite higher prices, due to infrastructure bottlenecks and this is unlikely to change in the near future. Even so, growth this year has returned to the extraordinary pace seen in 2014 during the first shale boom. Finally, Libyan production surged back in August to 950 kb/d, not far below the 1 mb/d level that was achieved for almost a year prior to the recent disturbances. However, as we have seen in the past few days with attacks on NOC headquarters, the situation is fragile.
As far as oil demand is concerned, following an increase of 1.4 mb/d in 2018, growth next year will be 1.5 mb/d. Even so, in 2018, we are seeing signs of weaker demand in some markets: gasoline demand is stagnant in the US as prices rise; European demand in the period May-July was consistently below year-ago levels; demand in Japan is sluggish notwithstanding very high temperatures and will be further impacted by the recent natural disasters. As we move into 2019, a possible risk to our forecast lies in some key emerging economies, partly due to currency depreciations versus the US dollar raising the cost of imported energy. In addition, there is a risk to growth from an escalation of trade disputes.
We are entering a very crucial period for the oil market. The situation in Venezuela could deteriorate even faster, strife could return to Libya and the 53 days to 4 November will reveal more decisions taken by countries and companies with respect to Iranian oil purchases. It remains to be seen if other producers decide to increase their production. The price range for Brent of $70-$80/bbl in place since April could be tested. Things are tightening up.
Data for June and July show a significant slowdown in European oil demand and robust non-OECD demand. US demand growth slowed in June but provisional numbers point to a year-on-year (y-o-y) rebound in 3Q18, as the y-o-y comparison will benefit from a less disruptive hurricane season - although threats from hurricanes are currently increasing. Non-OECD demand has so far been resilient in the face of significant currency depreciations in some countries that amplify the effect of higher dollar oil prices and deterioration in the economic environment. Non-OECD Asia oil demand, supported by China and India, is expected to post strong growth in 2018 and 2019. Global oil demand is expected to grow by 1.4 mb/d in 2018 and by 1.47 mb/d in 2019.
OECD Americas oil demand will post strong growth in 2018, supported by harsh weather conditions in 1Q18 and the start-up of petrochemical projects in the US. The strong y-o-y increase in oil prices is, however, capping growth, in particular for gasoline. OECD Americas oil demand is projected to increase by 330 kb/d in 2018, and in 2019 more ethane crackers coming on stream should support growth at 210 kb/d.
In OECD Europe, after growth of 230 kb/d y-o-y in 1Q18, demand posted a decline of 95 kb/d in 2Q18 and is projected at 175 kb/d below last year in 3Q18. Most of the decline is explained by weak gasoil demand. Heating oil deliveries were impacted by higher prices, persuading households to delay purchases. In addition, diesel deliveries have been very weak since the start of 2Q18, in particular in Germany and France. OECD Europe demand is set to decline by 45 kb/d in 2018, before recovering to show growth of 95 kb/d in 2019.
OECD Asia Oceania oil demand will post small declines in both 2018 and 2019. Overall, total OECD oil demand growth should remain roughly constant, at 250 kb/d in 2018 and 260 kb/d in 2019.
Non-OECD oil consumption should increase by 1.14 mb/d in 2018 supported by growth in Asia. In 2019, the pace will accelerate to 1.21 mb/d. Asia will continue to be the main source of growth (1.05 mb/d in 2018 and then 0.84 mb/d in 2019), most notably China and India.
In this Report, historical OECD oil demand data have been revised, based on new figures published by the US Department of Energy. Statistics for Nigeria, Indonesia and Iran have also been revised. Overall, new data for these four countries led to an upwards revision to global oil demand of 50 kb/d for 2017 and 1Q18.
Global oil supply rose in August by 80 kb/d to cross the symbolic 100 mb/d mark for the first time as higher output from OPEC more than compensated for a seasonal decline from non-OPEC. The August slip in non-OPEC supply masks the bigger picture, which is one of relentless growth led by record output from the US. Supply from non-OPEC stood 2.58 mb/d above August 2017. For the year as a whole, non-OPEC production is on track to expand by 2 mb/d, its highest in five years. Growth is expected to ease only marginally in 2019, to 1.8 mb/d, as a ramp up in Brazilian, Canadian and Russian supplies mitigates a slowdown in the US.
As for OPEC, crude oil production rose to a nine-month high of 32.63 mb/d, as a rebound in Libyan supply, near record Iraqi output and higher volumes from Nigeria and Saudi far outstripped a significant decline from Iran ahead of US sanctions. Compared with a year earlier, crude oil supply was 270 kb/d lower as higher Saudi, Iraqi and Kuwaiti output helped to offset declines in Venezuela, Angola and Iran.
The 24 countries party to the Vienna Agreement posted an overall compliance rate of 103% with a target cut of 1.72 mb/d, according to IEA estimates, compared with 95% in July. Non-OPEC compliance rose to 75%, thanks to maintenance curbs in Kazakhstan, while OPEC's rate eased to 115%.
Hurricanes and typhoons in the Gulf of Mexico and North Asia as well as an earthquake in Japan have so far inflicted minimal damage to refineries and have had a very limited impact on operations. Industrial accidents, on the other hand, have caused more serious outages, with major fires disrupting operations at German and Brazilian refineries. Planned seasonal maintenance is also weighing heavily on global refinery throughput. From August's record rate of 83.5 mb/d, runs decline by 1.8 mb/d in September - October before surging 2.8 mb/d in December to another record high of 84.5 mb/d.
East of Suez accounted for essentially all of the global growth in refinery runs in the first eight months of 2018, while Atlantic Basin throughput declined by 0.3 mb/d on average. In the last four months of the year, though, the growth is divided more equally, with each contributing about 0.5 mb/d. In the West, the US drives the growth with its record run rates. In the East, Indian and the Middle Eastern refineries lead the way.
OECD commercial stocks rose 7.9 mb month-on-month (m-o-m) in July to 2 824 mb, only the fourth monthly increase in the last year. The rise was less than half the typical level, and stocks declined to a 50 mb deficit against the five-year average. Stocks increased in the Americas and Europe, but fell modestly in Asia Oceania. Higher refining activity pressured crude stocks lower, while oil product inventories increased seasonally. Middle distillate inventories increased 13.8 mb m-o-m in July to 528 mb, the second monthly increase in a row. However, stocks of the product remained well below the five-year average. Fuel oil stocks fell 2 mb m-o-m to 115 mb, close to their lowest level in several years. 'Other product' inventories increased seasonally by 14.6 mb to reach 403 mb at end-month.
Overall, total oil stocks in the OECD have remained stable in a very narrow range of 2 816 to 2 828 mb since March. While it took only three to four months at the end of 2017 for stocks to fall from 3 000 mb to below 2 900 mb, the 2 800 mb mark is proving much harder to breach. OECD holdings have not been below 2 800 mb since the beginning of 2015.
For August, preliminary data showed significant stock builds in the US (+18.2 mb) and Japan (+16.5 mb), all but ensuring another monthly increase in OECD stocks. In both countries, the increase was sharper than implied by seasonal trends. Higher US stocks were driven by robust refinery runs which swelled inventories of diesel by 7.9 mb, propane by 7.1 mb and gasoline by 2 mb. US crude stocks fell 6.5 mb m-o-m, but higher domestic production limited the decrease. In Japan, stock builds were shared more equally between crude (+6.3 mb) and oil products (+10.2 mb) and linked to increased crude imports, on the one hand, and steady refinery activity, on the other. By contrast, preliminary data for Europe showed oil stocks declining 7.9 mb m-o-m as refiners drew down crude inventories.
Revised data showed decreases versus preliminary numbers. May OECD stocks were revised down by 1.8 mb and June holdings by 6.5 mb, with downward adjustments in the Americas and Asia Oceania.
While benchmark oil futures declined month-on-month (m-o-m) in August, towards the end of the month ICE Brent and NYMEX WTI bounced back. Brent reached a two-month high of $78.17/bbl on 4 September and US prices breached $70/bbl for the first time since July. Subsequently prices eased but in recent days they have returned to growth, with Brent and WTI currently at $79.06/bbl and $69.25/bbl, respectively. Reduced supply of sour crude from Venezuela and Iran saw prices for Mars, Urals and Basra Light and Basra Heavy strengthen. Conversely, an abundance of light, sweet crude continued to weigh on North Sea and West African grades. Strong demand helped middle distillate cracks to improve while fuel oil cracks came down from an early-August peak as power generation demand subsided.