Oil Market Report: 13 June 2018

Download full reportDownload tables

Highlights

  • Our demand growth estimate for 2018 has been left largely unchanged, at 1.4 mb/d. Recent data confirms strong growth in 1Q18 and in early 2Q18, partly due to colder weather in the northern hemisphere. A slowdown is expected in 2H18.
  • For 2019, our first estimate of demand anticipates growth of 1.4 mb/d. A solid economic background and an assumption of more stable prices are key factors. Risks include possibly higher prices and trade disruptions. Some governments are considering measures to ease price pressures on consumers.
  • Global oil supply rose 276 kb/d in May, to 98.7 mb/d, as non-OPEC output rose further to stand a hefty 2.2 mb/d above a year ago. OPEC production crept higher. Non-OPEC supply will grow by 2.0 mb/d in 2018, easing slightly to 1.7 mb/d.
  • OPEC crude supply edged up 50 kb/d in May to 31.69 mb/d. Higher flows from Saudi Arabia, Iraq and Algeria offset a fall in Nigeria and further declines in Venezuela. While the call on OPEC is set to ease in 2019, potential losses from Venezuela and Iran could require others to produce more.
  • OECD commercial stocks declined 3.1 mb in April to a new three-year low of 2 809 mb. Middle distillate holdings fell 7.4 mb in April and were significantly below the five-year average in the Americas and Europe ahead of the peak demand season in the northern hemisphere.
  • Outright benchmark crude prices reached multi-year highs in late May but have since fallen back awaiting the outcome of the OPEC meeting. ICE Brent and NYMEX WTI futures prices are up 14% and 9%, respectively, this year.
  • Estimated 2Q18 refinery runs are revised down to 80.9 mb/d, but for 3Q18 they are revised higher to 82.5 mb/d. Refined products stocks should build in 3Q18 by 0.4 mb/d after drawing by 1.2 mb/d in 2Q18. Despite Brent prices briefly touching $80/bbl, margins were generally higher m-o-m.

Filling the gap

In this Report, we publish our first estimates for global oil demand and non-OPEC supply for 2019. Rapidly rising prices in recent months have raised doubts about the strength of demand growth, and we have modestly downgraded our estimate for 2018. Prices are unlikely to increase as sharply as they did from mid-2017 onwards and thus the dampening effect on demand will be reduced. Demand might also receive support from measures under consideration in some countries, e.g. Argentina, Brazil, India, Indonesia, Russia and Turkey, to help consumers cope with higher prices. When you add the boost to demand from the growing petrochemicals sector, where some projects are coming on stream earlier than previously thought, the result is global oil demand growth for 2019 of 1.4 mb/d, similar to this year's level. Of course, there are downside risks: these include the possibility of higher prices, a weakening of economic confidence, trade protectionism and a potential further strengthening of the US dollar.

As far as supply is concerned, we have revised upwards our estimate for 2018 non-OPEC production growth to 2 mb/d and in 2019 we will also see bumper growth, albeit slightly reduced, of 1.7 mb/d. The United States shows by far the biggest gain (about 75% of the total across 2018 and 2019), but recently this expansion has not been without stress. The discount for WTI versus Brent has blown out to $10/bbl, amidst signs that takeaway capacity is lagging behind output growth. In this Report, (see Supply, "West Texas pipelines: Bigger is better") we have updated our analysis of infrastructure first published in Oil 2018 - Analysis and Forecasts to 2023. We think that in Texas by end-2019 there will be a net 575 kb/d of additional pipeline capacity beyond our earlier number, albeit with most of it coming on line in the second half of the year. In the meantime, capacity will likely remain tight but production will still be able to grow strongly, by 1.3 mb/d this year and 0.9 mb/d in 2019. Our non-OPEC growth for 2019 includes a modest increase from Russia reflecting a possible contribution to compensating for lost production from Iran and Venezuela.

The issue of exports from Venezuela and Iran is likely to dominate the agenda when leading producers meet in Vienna later this month. For our part, we have looked at a scenario, not a forecast, showing that by the end of next year output from these two countries could be 1.5 mb/d lower than it is today. In Iran's case, we assume a loss of exports close to that seen in the last round of sanctions, recognising that this remains uncertain and a broader range of outcomes is possible. No judgement was made as to which countries will cut back purchases. For Venezuela, we assume no respite in the production collapse that has taken 1 mb/d off the market in the past two years.

To make up for the losses, we estimate that Middle East OPEC countries could increase production in fairly short order by about 1.1 mb/d and there could be more output from Russia on top of the increase already built into our 2019 non-OPEC supply numbers. However, even if the Iran/Venezuela supply gap is plugged, the market will be finely balanced next year, and vulnerable to prices rising higher in the event of further disruption. It is possible that the very small number of countries with spare capacity beyond what can be activated quickly will have to go the extra mile.

Statements by several parties suggest that action in terms of higher supply could be on the way. In the meantime, the IEA is monitoring the market situation closely, and, as ever, stands ready to advise its member governments on any action that might be necessary. It is also in regular dialogue with emerging importing countries. We support all efforts to minimise supply disruptions that, as history shows us, are not in the interests of either producers or consumers.

Demand

Summary

In this Report, we present for the first time our outlook for oil demand in 2019. Meanwhile, our growth estimate for 2018 has been left roughly unchanged, at 1.4 mb/d. While recent data continue to point to very strong demand in 1Q18 and the start of 2Q18, provisional data point to a slowdown in oil demand later in April and May. Demand at the start of 2018 was supported by weather conditions in Europe and the US, the start-up of petrochemical capacity in the US, and strong economic activity. As higher prices take hold we expect growth to slow from 1.5 mb/d in 1H18 to 1.25 mb/d in 2H18. In 2019, the comparison with a strong 1H18 will keep growth close to 1.2 mb/d in the first half of the year. Solid economic growth and stable prices will support an acceleration of demand growth to 1.65 mb/d in the second half. Overall, we expect growth of 1.4 mb/d in 2019.



Growth in the OECD Americas is projected to be very strong in 2018, at 315 kb/d, supported by the start-up of petrochemical projects in the US. More ethane crackers coming on stream in 2019 should help maintain growth of 180 kb/d for the year. Demand growth for the OECD as a whole should slow slightly, from 310 kb/d in 2018 to 245 kb/d in 2019.

Non-OECD oil consumption should increase by 1.05 mb/d in 2018, a slightly slower growth rate than the 1.16 mb/d seen in 2017 as rising prices will act as a dampener. In 2019, the price is expected to remain roughly unchanged y-o-y, and non-OECD demand growth will rise to 1.2 mb/d.


Supply

Global supply summary

Robust non-OPEC supply growth is expected to extend well into 2019. After posting a hefty 2.0 mb/d increase in 2018, gains will slow only marginally to 1.7 mb/d next year. The US continues to dominate the expansion, but infrastructure and logistical constraints are likely to cap gains. Growth is also expected to slow in Canada, as the commissioning of new projects slows and takeaway capacity fills up. The pace picks up in Brazil, however, with a number of new production units set to come on stream. The outlook for Russia depends on the outcome of the Vienna Agreement meeting later this month. What is clear is that Russian producers stand ready to boost output if free to do so. Across the rest of the world, with a few exceptions, declines at mature fields more than offset new field start-ups. Higher prices and a tentative investment rebound underpin a slowing in the rate of overall decline, however, compared with the 2015-2016 period.



In OPEC, little new capacity is expected on line over the coming 18 months. An increase of 240 kb/d in OPEC crude production capacity during 2019 takes overall capacity to 35.1 mb/d by the end of the year and includes the resumption of output from the Neutral Zone that has been shut in since 2015. Marginal increases are also expected from Iraq and the UAE. Venezuelan capacity is expected to sink by a further 200 kb/d next year, to only 790 kb/d, after plunging by 760 kb/d in 2018, although, of course, there is considerable uncertainty.

During May, record output from the US pushed non-OPEC supply up 2.2 mb/d above a year ago, with production rising 225 kb/d month-on-month (m-o-m) to stand at 60.05 mb/d. The robust non-OPEC performance, combined with a slight uptick in OPEC supply, lifted world oil production by 275 kb/d in May to 98.66 mb/d. OPEC oil supply inched up 50 kb/d, but was down 570 kb/d on 2017 due to Venezuela's collapse. Crude production edged up 50 kb/d to 31.69 mb/d.

Producers party to the Vienna Agreement, led by Saudi Arabia and Russia, will discuss whether to ease supply cuts that have been in place since 2017 when they meet later in June. During May, output from the 24 producers rose slightly, yet compliance with agreed cuts remained robust. Even if Venezuela's excessive output loss were removed from the equation, OPEC compliance would still be above 100%. The non-OPEC performance dropped to 60% from 76% a month earlier and its lowest since March 2017.

Although our balance shows the call on OPEC falling by nearly 0.4 mb/d in 2019, further declines in Venezuela and the potential impact of sanctions against Iran would require higher production from those producers with spare capacity. If the other 12 OPEC members were to continue pumping at the same rate as May, a potential supply gap could emerge and lead to a draw on stocks of more than 1.6 mb/d in 4Q19. Only OPEC's Middle East members have the ability to ramp up production swiftly, should cuts be relaxed (see Where's the spare?). If, on the other hand, the gap were filled, OPEC spare capacity could fall in 2H19 to around 2.5 mb/d (excluding Iran) - the lowest level since the end of 2016 when record rates from the Middle East shrank spare capacity to around 1.9 mb/d.


Stocks

Summary

OECD commercial stocks declined counter-seasonally by 3.1 mb month-on-month (m-o-m) in April to 2 809 mb, reaching a new three-year low. Inventories have fallen in eight of the last nine months. OECD crude and oil products both drew moderately, whereas NGL holdings increased. Higher refinery throughput in Asia Oceania helped reduce crude holdings, while strong demand for middle distillates in Europe and the Americas triggered a counter-seasonal draw. At end-month, OECD stocks were 27 mb below the five-year average, with crude and oil products both in deficit. OECD inventories may only take a few months to fall to the ten-year average, as the excess was just 55 mb at the end of April.



Middle distillate holdings fell 7.4 mb m-o-m to 526 mb, their lowest level since April 2015. While stock levels remain ample in Asia Oceania, they are well below the five-year average in the Americas and in Europe, which is the world's key diesel-consuming region. In the Americas, the draw appears largely driven by higher industrial demand - including from LTO producers in Texas - as well as steady exports to Latin America due to refining problems there. In Europe, higher demand from end-consumers and lower refinery runs in the past few months are the chief culprits. Overall, stocks look tight ahead of the northern hemisphere summer, when demand increases, and diesel prices have risen. OECD industry distillate stocks covered 29.7 days of forward demand at end-April, down from 34.9 days last year.



In May, total commercial oil stocks increased by 20.4 mb in the US and 7.7 mb in Japan, putting a stop to the downward trend seen since July 2017. While inventories usually increase at this time of year in both countries, the build was larger than expected. US crude stocks increased by 1.3 mb, however this compares with an average draw of 8.9 mb for the month over the last five years. Refining runs increased from April, but not fast enough to absorb ever-increasing LTO production. In Japan, most product categories gained slightly more than usual for the time of year. European inventories decreased 2.5 mb during May, preliminary figures from Euroilstock also showed.



OECD oil inventories were revised up 1.6 mb in February and down by 6.3 mb in March. The largest revisions were made in Europe in March, particularly for gasoline (-7.3 mb) and middle distillate inventories (-5.1 mb).

Prices

Market overview

Healthy demand and supply uncertainty saw outright benchmark crude prices peak in late May but have since fallen back. Higher retail fuel prices (see Pumped up prices) and the ongoing threat of a global trade war have the potential to derail demand growth, while on the supply side, US production continues to rise and there have been reports that members of the Vienna Agreement may lift output sooner than expected. Throughout the month, physical markets, particularly in the North Sea and West Africa, showed weakness with ample supply from the US eating into market share and pressuring differentials. Global diesel markets are tight, while wholesale gasoline markets are well supplied ahead of peak demand season in the northern hemisphere.

Refining

Summary

For 2Q18, global refinery throughput is turning out lower than in our forecast, with the latest data updates resulting in a 0.3 mb/d downward revision. Unplanned shutdowns and delayed restarts affected refinery activity in the US and Europe in April, combined with lower than expected throughput in India. After a strong start in January, with runs up 1.3 mb/d year-on-year (y-o-y), refiners slowed down significantly. Only a 0.6 mb/d y-o-y increase is expected in 2Q18.

Growth accelerates in 3Q18 to 1.1 mb/d y-o-y, with global throughput reaching a record 82.5 mb/d on expected strong increases in China, a rebound in the US versus 3Q17's hurricane-related slowdown, recovery in Mexico and new capacity ramping up in several countries. 



Apart from refining estimates, changes to quarterly demand have resulted in a shift of the refined product draws to the first half of this year. Global product stock draw estimates for 1Q18 and 2Q18 have increased, while 3Q18 is back to the normal seasonal build with a modest 0.4 mb/d replenishment expected. This, however, results in 1.1 mb/d of crude oil stock draws, assuming OPEC output stays flat from the May 2018 level. The risks to the crude oil balances, however, are skewed towards increased tightness pending further developments in Venezuela and Iran.



Margins

The estimated 1.2 mb/d draw in refined product balances in 2Q18 is finally showing up in refinery margins. Despite crude prices increasing $5/bbl on average in May and Brent futures briefly touching the symbolic $80/bbl mark, product cracks persisted, with margins generally higher month-on-month (m-o-m). North West European refiners saw relatively modest gains for sweet crude processing, but tighter Urals differentials affected sour margins. Singapore and US Gulf Coast gains were also in a moderate range, especially compared to the US Midcontinent, where margins surged by more than $4/bbl m-o-m on strong gasoline prices. Global refinery throughput is expected to ramp up by 2.2 mb/d from May and peak in August, but demand is also increasing seasonally, especially for road transport and aviation.