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Oil Market Report: 19 January 2017

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Highlights

  • The global demand outlook for 2016 has been raised following the release of robust preliminary 4Q16 numbers. Colder weather in northern Europe provided impetus as did rapid industrially-driven Asian growth. Global oil demand growth for 2016 is now expected to be 1.5 mb/d, slowing to 1.3 mb/d in 2017 as product prices potentially rise.
  • Global oil supplies fell by more than 0.6 mb/d in December, to 97.6 mb/d on lower OPEC and non-OPEC output. For 2016, world supply was up 0.3 mb/d from the previous year as record OPEC output more than offset a 0.9 mb/d decline in non-OPEC.
  • OPEC crude production, now excluding Indonesia, fell 320 kb/d from record rates to 33.09 mb/d in December after lower Saudi output and disruptions in Nigeria curbed supply. Early indications suggest a deeper OPEC reduction may be under way for January, as Saudi Arabia and its neighbours enforce supply cuts.
  • Non-OPEC supplies are forecast to grow by 385 kb/d in 2017, as higher prices in the wake of an anticipated coordinated supply cut stimulate increased investment in the US. Recovering LTO production underpins a 320 kb/d gain in total US output this year.
  • OECD industry stocks fell across crude and oil products in November, marking a fourth consecutive monthly decline. Taking into account preliminary data for December, stocks are 82 mb below July's historical peak, even if for now they remain above the symbolic 3 000 mb level.
  • Oil prices rose in early December and stayed within a $53-57/bbl range thereafter. Dubai, after weakening initially, gained versus other benchmarks due to lower expected OPEC output, opening the arbitrage to Asia for Brent and WTI-linked crudes. Fuel oil was a strong performer due to supply shortages.
  • Higher estimates for 4Q16 global refinery crude throughput - up by 160 kb/d - were partly responsible for a 260 kb/d downward revision for 1Q17. Our analysis of refined product stocks movements shows a 4Q16 build in the OECD, with the overhang in non-OECD implied refined product inventories persisting.

A six-month probation?

The output cuts announced by OPEC and eleven non-OPEC producers have entered their probation period and it is far too soon to see what level of compliance has been achieved. The coming weeks will provide more clarity and in the meantime developments elsewhere in the oil supply/demand balance are very intriguing. Once again we have revised upwards our estimate for global oil demand growth in 2016: we now see growth at 1.5 mb/d, with most of the revision contributed by stronger European demand, mainly in LPG and diesel. Europe has seen two years of year-on-year growth following nine straight years of flat or declining demand.

In 2017, however, we still expect the rate of growth for global demand to fall back to 1.3 mb/d, albeit this is slightly above the average rate seen in this century of 1.2 mb/d. The prospect of higher product prices - assuming that the cost of crude oil rises in 2017 - plus the possibility of a stronger US dollar are factors behind our reduced demand growth outlook for this year.

In non-OPEC countries, the stabilisation since mid-December of Brent crude oil prices around the $55/bbl level, and the assumption that lower output from the parties to the output agreement will probably see prices rise, is offering encouragement to higher cost producers. Attention is inevitably focused on the US shale oil patch where data shows the rig count increasing for six straight months to November after reaching its nadir in May 2016; provisional data for December shows the highest number of new rigs added since the heady days of April 2014. Not only is the rig count rising, but recent reports tell us that the productivity of shale activity has improved in leaps and bounds. Whether it be shorter drilling times or larger amounts of oil produced per well, there is no doubt that US shale industry has emerged from the $30/bbl oil world we lived in a year ago much leaner and fitter. The IEA has anticipated for some time that LTO production will increase in 2017, but we are now expecting an even larger increase of 170 kb/d, following a decline of nearly 300 kb/d last year.



Non-OPEC production is not all about the US, however. Elsewhere, long-planned projects are coming on stream in Brazil and Canada and their combined production will rise by 415 kb/d this year. In China and Colombia, the sharp declines in production seen in 2016 will be reduced. For the non-OPEC countries as a whole, net production growth will be 380 kb/d - after taking into account the output reduction commitments by eleven countries - and this increase could be supplemented by higher production from Libya and Nigeria, both of which are exempt from the production cuts.

We were reminded on Jan. 16th by Saudi Arabia's oil minister that the output deal might not be extended beyond its six month expiry date. By saying that an extension was "unlikely" he has issued a powerful reminder that if stocks are drawn in the first half of 2017 by the approximately 0.7 mb/d implied by OPEC producing close to its target with support from other producers, the market will have tightened and prices stabilised but not at a sufficiently high level to allow another bonanza for high cost producers. In the meantime, the market awaits the outcome of the output deal.

Demand

Summary

  • Strong 4Q16 demand numbers pulled the overall 2016 global growth estimate up to 1.5 mb/d, 0.1 mb/d above our previous growth estimate but below the revised five-year growth peak of 2.0 mb/d seen in 2015. Potentially higher product prices in 2017 will trim back momentum to around 1.3 mb/d, closer to the five-year trend seen in 2011-15.
  • Surprisingly robust gains across much of northern Europe, Russia and Asia triggered renewed demand vigour in 4Q16. Having eased to a two-year low of +1.2 mb/d in 3Q16, year-on-year (y-o-y) demand growth rebounded to +1.6 mb/d in 4Q16, pulled higher by a combination of resurgent industrial activity and colder winter weather conditions.
  • Ending a one-year hiatus, Japanese demand growth returned in November with strong gains in gasoil, residual fuel, LPG and naphtha as resurgent underlying industrial activity - which increased to a two-and-a-half year high - raised demand.
  • Upgrades to estimates of Middle Eastern demand added approximately 0.1 mb/d to the 2015-16 baseline numbers. 'Other products' accounted for the majority of this reassessment following revisions to official data from the Joint Oil Data Initiative (JODI).
  • The uptick in Chinese demand growth seen in November roughly matched the recovery forecast in last month's Report. Strong petrochemical-led gains in LPG led November's near 4% y-o-y increase, as did the sharp easing in gasoil's downside momentum.

Supply

Summary

  • Global oil supplies fell by more than 0.6 mb/d in December due to lower OPEC and non-OPEC output. At 97.6 mb/d, global liquids production was nevertheless 0.2 mb/d higher than a year ago, as rampant OPEC production more than offset a 1.1 mb/d decline in non-OPEC supplies.
  • OPEC crude production, now excluding Indonesia throughout, fell 320 kb/d from record rates to 33.09 mb/d in December after lower Saudi output and disruptions in Nigeria curbed supply. Early indications suggest a deeper OPEC reduction may be under way for January, as Saudi Arabia and its neighbours enforce supply cuts.
  • Iran, Iraq and Saudi Arabia ranked as the world's top sources of growth in 2016. Iran, relieved of sanctions, raised crude output by 690 kb/d, while record production in Iraq and Saudi Arabia pushed up supply by 410 kb/d and 260 kb/d, respectively. Robust output from the low-cost Middle East lifted OPEC production in 2016 to an unprecedented 32.6 mb/d, up 970 kb/d year-on-year (y-o-y).
  • Non-OPEC oil production is estimated to have dropped by 315 kb/d in December, mainly due to seasonally lower global biofuels output. At just over 57.7 mb/d, including Indonesia throughout, total non-OPEC liquids production was nearly 1.1 mb/d below a year earlier.
  • Non-OPEC supply growth for 2017 has been revised up by 175 kb/d since last month's Report as higher prices stimulate increased investment in the US. Non-OPEC production is now seen averaging 58 mb/d, 385 kb/d higher than a year earlier. For 2016 meanwhile, estimates have been cut by 50 kb/d due to a reassessment of production in Congo and slightly lower biofuels output.
  • US total oil production is forecast to increase by 320 kb/d in 2017, to average 12.8 mb/d. Crude oil supplies are on track to rise by 140 kb/d as higher prices and increased investments are spurring new Light Tight Oil (LTO) growth. The output of natural gas liquids is seen rising 200 kb/d, supported by new export and petrochemical facilities.

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

Stocks

Summary

  • OECD industry stocks fell across crude and oil products in November, marking a fourth monthly decline. However, inventories remain 311 mb above the five-year average.
  • Preliminary data show a fifth monthly draw in oil stocks in the OECD in December, with crude oil rather than products likely to have driven the fall.
  • Chinese crude stocks recovered in November on higher imports and likely built further in December.

Prices

Summary

  • Benchmark crude prices increased early in December after OPEC's deal announcement and stayed elevated throughout the month. At the time of writing, front-month Brent was $54.40/bbl.
  • Sour benchmark Dubai, after weakening initially, rose in the second half of December on the back of lower planned OPEC output, opening the arbitrage to Asia for Brent and WTI-linked crudes.
  • Oil product prices generally followed the crude price rise, even if they lagged in most regions. Fuel oil in December was a strong performer for the second month running due to supply shortages.
  • Spot freight rates for dirty and clean tankers continued to rise in December with high shipments from OPEC and non-OPEC countries, and the return of refineries from maintenance.

Refining

Summary

  • 4Q16 global refinery throughput is estimated to have seasonally declined by 610 kb/d from 3Q16, up 520 kb/d year-on-year (y-o-y). At 79.26 mb/d, the estimate is 160 kb/d higher than in our previous Report.
  • Our forecast for 1Q17 refinery throughput is revised down by 260 kb/d to 79.36 mb/d, only 80 kb/d higher y-o-y, as higher refining activity in 4Q16 slowed the global refined product stocks drawdown.
  • Following implied product stock draws in 1Q17, our forecast for crude throughput for April 2017 is at 78.75 mb/d, with a y-o-y growth rebounding to 550 kb/d (See Are we there yet?).