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Oil Market Report: 13 April 2017

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Highlights

  • Global demand growth of 1.3 mb/d is forecast for 2017, a second consecutive annual decline and slightly below our prior forecast following weaker than expected 1Q17 demand. Subdued gains in Russia and India, and weaker momentum in OECD countries, were key factors.
  • World oil supply fell by 755 kb/d in March as OPEC and non-OPEC producers pumped less and improved compliance with the output reduction pact. Total non-OPEC output is set to rise again, however, with growth of 485 kb/d expected in 2017, recovering from a decline of 790 kb/d last year.
  • OPEC crude output fell by 365 kb/d in March to 31.68 mb/d, led by losses in Nigeria, Libya - both exempt from supply cuts - and Saudi Arabia. OPEC's 1Q17 output of 31.9 mb/d was 240 kb/d below the 1Q17 "call" on its crude. The call rises to 32.9 mb/d in 2Q17, which implies global stocks will draw further if OPEC maintains solid adherence to its supply cut.
  • OECD industry stocks drew moderately in February and are forecast to fall further in March. However, due to January's large build, we estimate OECD stocks gained 38.5 mb (425 kb/d) in 1Q17. Marginal stocks held offshore or in smaller facilities drew by an estimated 325 kb/d during the same period.
  • Crude prices fell more than $3/bbl on average in March, but rose by $5/bbl in early April. Money managers cut their net long positions in crude futures by 200 mb in March amid the price fall. Product prices showed few signs of rallying during the refinery maintenance season.
  • After 1Q17's almost flat performance vs 1Q16, refinery throughput in 2Q17 will grow 1.15 mb/d y-o-y. Refinery crude demand will surge by 3.5 mb/d between March and July, with most of the increase coming from Atlantic Basin refiners and the Middle East.

Half time

It is now half time for the six-month oil production cuts agreed by OPEC and eleven non-OPEC countries. So far, the game has gone fairly well for producers. Prices have stabilised again recently after falling by about ten percent in early March, with recent unplanned outages and rising political tension in the Middle East playing a role. For OPEC countries, compliance has been impressive from the start while non-OPEC participants are gradually increasing their compliance rate, although in their case it is harder for analysts to verify the data.

Even at this mid-way point, we can consider what comes next. It is of course OPEC's business to decide on its output levels, but a consequence of (hypothetically) extending their output cuts beyond the six-month mark would be bigger implied stock draws. This would provide further support to prices, which in turn would offer further encouragement to the US shale oil sector and other producers.

Indeed, although the oil market will likely tighten throughout the year, overall non-OPEC production, not just in the US, will soon be on the rise again. Even after taking into account production cut pledges from the eleven non-OPEC countries, unplanned outages in Canada as well as in the North Sea, we expect production will grow again on a year-on-year basis by May. For the full year, we see growth of 485 kb/d, compared to a decline of 790 kb/d in 2016. The main impetus comes from the US where monthly data shows that output reached 9.0 mb/d in March, up from a trough of 8.6 mb/d in September 2016. We now expect that US production will be 680 kb/d higher at the end of the year than it was at the end of 2016, an upgrade to our previous forecast.

Another factor that could influence the market balance is revised demand growth. We have cut our growth number for 1Q17 by 0.2 mb/d to 1.1 mb/d. New data shows weaker-than-expected growth in a number of countries including Russia, India, several Middle Eastern countries, Korea and the US, where demand has stalled in recent months. After upgrading demand estimates for 2Q17 and cutting it for the second half of the year, we are left with growth for 2017 at 1.3 mb/d rather than the 1.4 mb/d previously forecast.

Looking at observed stocks versus the implied gap between demand and supply; new OECD stocks data for February shows that, set against the conventional measure of the five-year average, they remain about 330 mb above this level. OECD stocks, particularly products, drew by 0.8 mb/d in 4Q16, but we estimate that in 1Q17 they increased by 0.4 mb/d, mainly for crude oil and, in turn mainly in Europe and the US. Outside of the OECD, in the Stocks section of this Report we show that a group of stock centers, including Saldanha Bay, the Caribbean and floating storage have, provisionally, seen stocks fall by 0.3 mb/d in 1Q17. The net result is that global stocks might have marginally increased in 1Q17 versus an implied draw of about 0.2 mb/d. It can be argued confidently that the market is already very close to balance, and as more data becomes available this will become clearer. We have an interesting second half to come.

Demand

Summary

  • Growth of 1.3 mb/d is foreseen for 2017, taking total global demand up to an average 97.9 mb/d. This represents a deceleration from the growth of 1.6 mb/d seen in 2016, chiefly attributable to weaker OECD momentum.
  • For 1Q17, demand data shows global growth easing back to 1.1 mb/d year-on-year (y-o-y), roughly half the growth rate seen in 4Q16. Slowdowns in the US and OECD Asia Oceania were notable. Non-OECD demand growth remained stable at 1.1 mb/d in 1Q17, although this hides a variety of changes, with many East Asian economies accelerating, and India and Russia slowing abruptly.
  • The latest Chinese data show further accelerations in demand growth. Having bottomed-out in 3Q16, as transitory factors dampened momentum, y-o-y growth has since recovered steadily, reaching 430 kb/d in 1Q17, its highest level since 2Q16, as industrial activity solidified while closely watched business sentiment indicators hovered near two-and-a-half-year highs. Other Asian economies, such as Hong Kong and Chinese Taipei, have also seen sharp upticks, post 3Q16.
  • The Middle East demand picture has been mixed in recent months, with weakness prevalent in Iran and Saudi Arabia in contrast to relatively robust gains in Kuwait and Iraq. Supporting growth in the majority of net oil-exporting economies are oil prices typically 40% up on year-earlier levels. In Saudi Arabia, however, cuts in public expenditure remain an important factor in dampening activity.
  • Downgrades to a number of Middle Eastern and African countries resulted in reduced 4Q16 global demand of 97.7 mb/d, 165 kb/d less than previously quoted but still 2.1 mb/d up on the year earlier.

Supply

Summary

  • The world's oil supply fell by 755 kb/d in March as OPEC and non-OPEC producers pumped less and tightened compliance with a global output pact. At 95.98 mb/d, production stood 195 kb/d below a year ago. Global supply of 96.35 mb/d during 1Q17 was 310 kb/d below the same period in 2016.
  • OPEC crude output fell by 365 kb/d in March to 31.68 mb/d, led by losses in Nigeria, Libya - both exempt from the group's supply cuts - and Saudi Arabia. Production from most members bound by the six-month output deal edged lower, boosting compliance in March and putting 1Q17 adherence at a robust 99%. Overall March crude supply was 230 kb/d below a year ago.
  • OPEC's 1Q17 crude oil output of 31.9 mb/d was down 1.38 mb/d from the record seen in 4Q16 and came in 240 kb/d below the 1Q17 "call" on its crude. The requirement for OPEC crude rises to 32.9 mb/d in 2Q17, which implies global stocks will draw further if OPEC maintains solid adherence to its 1.2 mb/d supply cut. The call on OPEC rises through 2H17 and reaches 33.5 mb/d during the final quarter of the year.
  • Non-OPEC oil supplies dropped by 390 kb/d in March on lower shipments from the North Sea, further output cuts in Russia and as an unscheduled outage curbed production in Canada. At 57.6 mb/d, total output stood 150 kb/d below a year ago, compared with an annual decline of 790 kb/d in 2016.
  • The outlook for US crude oil production has been revised higher by 55 kb/d for 2017 on vigorous drilling activity since the start of the year. US crude production at the end of the year will be 9.5 mb/d, 690 kb/d higher than at the end of 2016. For the year as a whole, growth in US crude supply is expected to average 260 kb/d, while total non-OPEC liquids are forecast to expand by 485 kb/d, to 58.1 mb/d.
  • Compliance from non-OPEC's 11 that pledged to cut output by 558 kb/d from January, is estimated to have improved to 64% in March, from 38% a month earlier. Russian output dropped by 56 kb/d in March, with government officials maintaining that the 300 kb/d reduction will be met by the end of April. Mexico, Oman and Azerbaijan had likely met their obligation by March, while Kazakhstan's production continued to rise.

All world oil supply data for March discussed in this report are IEA estimates. Estimates for OPEC countries, Alaska, Azerbaijan and Russia are supported by preliminary March supply data.

Stocks

Summary

  • After a sizeable build in January, OECD industry stocks fell in February by 8.1 mb. Crude inventories increased due to a seasonal drop in refinery runs but were more than offset by falling product stocks.
  • Crude stocks built to record levels in the US in February and March, although they fell in Europe and Japan. OECD oil product stocks are estimated to have fallen in February-March.
  • Preliminary data show oil stocks in the OECD drawing by 17.2 mb in March. Given January's strong build, this implies a total stock increase of 38.5 mb (425 kb/d) in 1Q17.
  • Known non-OECD stocks are estimated to have drawn 325 kb/d over 1Q17, implying that marginal stocks held offshore or in smaller facilities are starting to fall partly in reaction to OPEC's output cuts.

Prices

Summary

  • Benchmark crude prices fell more than $3/bbl on average in March as visible crude stocks in OECD member countries failed to draw substantially. Prices had risen by $5/bbl at the time of writing.
  • Money managers cut their net long positions in crude futures by a combined 200 mb in March amid the price fall, but remain optimistic overall about the price outlook.
  • Physical crude differentials eased as the spring refinery maintenance season intensified, reducing demand for crude from refiners. US crude prices went up following an outage in Canada.
  • Oil product prices came down, reflecting improved supplies. Diesel and fuel oil prices fell less than other products, while gasoline in the US Gulf Coast was a notable strong performer.

Refining

Summary

  • Global refinery throughput in January registered a modest 340 kb/d year-on-year (y-o-y) increase, although it was 1 mb/d lower than December's historical record of 81.7mb/d.
  • Throughput in 1Q17 is estimated almost flat y-o-y (+50 kb/d), as spring maintenance this year is weighted towards February/March.
  • In 2Q17, throughput is expected to grow 1.15 mb/d y-o-y, the fastest rate since 1Q16. Runs ramp up throughout the quarter and reach above 82 mb/d in July, some 3.5 mb/d higher than in March.