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Oil Market Report: 10 November 2016

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Highlights

  • Global oil supply rose 0.8 mb/d in October to 97.8 mb/d after producers in OPEC and non-OPEC opened the taps. World oil output was 0.8 mb/d above a year ago, with higher OPEC supply offsetting non-OPEC declines. After declining by 0.9 mb/d in 2016, non-OPEC production is expected to grow by 0.5 mb/d next year.
  • OPEC crude output rose by 230 kb/d to a record 33.83 mb/d in October after production recovered in Nigeria and Libya and flows from Iraq hit an all-time high. Output from the group’s 14 members has climbed for five months running, led by Iraq and Saudi Arabia. In October, OPEC supply stood nearly 1.3 mb/d above a year ago.
  • Oil demand growth is forecast to ease to 1.2 mb/d in 2016 due to sharp slowdowns in the OECD Americas and China. A similar expansion is foreseen in 2017. Oil demand peaked at a five-year high of 1.8 mb/d in 2015.
  • OECD commercial stocks fell for the second month in a row in September, by 17.1 mb to 3 068 mb. In China, stocks of crude built by 29.7 mb in September. Initial data point to renewed crude stock builds in the US and Japan. Stock builds could continue through 2017 if OPEC does not agree to production restraint at its forthcoming meeting in Vienna.
  • Global refinery runs are expected to fall by a seasonal 1 mb/d in 4Q16 to 78.9 mb/d, up 150 kb/d year-on-year (y-o-y).Annual growth of 270 kb/d for 2016 is the lowest increase in more than a decade.
  • Benchmark crude prices followed a bell-shaped curve in October, rising in the first part of the month before erasing nearly all of those gains on doubts about the likelihood of an OPEC production agreement. At the time of writing, front-month ICE Brent was trading at $46.79/bbl.

HOLDING THE LINE

The issue that currently dominates the outlook for the oil market is the outcome of OPEC’s ministerial meeting in Vienna on 30 November. It has only been two months since OPEC last met in Algiers and announced it would examine how to set up a production ceiling of between 32.5 mb/d and 33.0 mb/d. OPEC also said it would seek to bring leading non-OPEC producers into the process. We can’t predict the outcome of the 30 November meeting, but we can see the scale of the task ahead. In this report we estimate that OPEC members pumped 33.8 mb/d in October, well in excess of the high end of the proposed output range. This means that OPEC must agree to significant cuts in Vienna to turn its Algiers commitment into reality.

Whatever the outcome, the Vienna meeting will have a major impact on the eventual - and oft-postponed - re-balancing of the oil market. But it is not the only factor at play. Unfortunately for those seeking higher prices, an analysis of the other components provides little comfort. The world’s biggest crude oil producer Russia will see its output increase by 230 kb/d in 2016, and sustained production at current record levels would result in growth of nearly 200 kb/d next year. With production also expected to grow in Brazil, Canada and Kazakhstan, total non-OPEC output will rise by 0.5 mb/d next year, compared to a fall of 0.9 mb/d in 2016. This means that 2017 could be another year of relentless global supply growth similar to that seen in 2016.

On the demand side of the oil balance, our outlook for world oil demand growth at 1.2 mb/d in 2016 and 2017 remains unchanged. There is currently little evidence to suggest that economic activity is sufficiently robust to deliver higher oil demand growth, and any stimulus that might have been provided at the end of 2015 and in the early part of 2016 when crude oil prices fell below $30/bbl is now in the past.

If the OPEC countries do implement their Algiers resolution the resultant production cut will see the market move from surplus to deficit very quickly in 2017, albeit with a considerable stock overhang that will take time to deplete. On the other hand, if no agreement is reached and some individual members continue to expand their production then the market will remain in surplus throughout the year, with little prospect of oil prices rising significantly higher. Indeed, if the supply surplus persists in 2017 there must be some risk of prices falling back.

It is not the role of the IEA to urge any oil industry player to take one course of action rather than another, and we are not doing so now. Over time, market forces will do their job and the oil price will respond to the signals provided by demand and supply. What the IEA has argued for consistently is the need for investments necessary to meet rising oil demand. Such investments ensure that the market remains close to balance and that prices are as stable and as fair for both producers and consumers as can ever be possible in such a dynamic industry.

Demand

Summary

  • Oil demand growth is forecast to ease to 1.2 mb/d in 2016, having peaked at a five-year high of 1.8 mb/d in 2015, due to slowdowns in the OECD Americas and China. A similarly paced expansion is foreseen in 2017.
  • The latest official data for the US showed deliveries climbing to an eight-and-a-half year high of 20.1 mb/d in August, confirming the forecast cited in last month’s Report. This is higher by 200 kb/d on the year earlier, supported by strong gains in gasoline and jet/kerosene. Both US growth and absolute demand have attained recent peaks; the former rose to a five-month high, while absolute deliveries at 20.1 mb/d were their highest level since early 2008. This robust 200 kb/d expansion is still down dramatically on the near 600 kb/d year-on-year (y-o-y) gain of mid-2015.
  • Having seen somewhat hiccupping demand in recent months, August data showed the Middle East recovering modestly, with Saudi Arabia, Kuwait and Qatar all re-accelerating while Iran’s decline eased. The greatest upside was seen in Middle Eastern jet fuel, gasoline and residual fuel oil. The recent flattening in Iranian demand coming in stark contrast to the heavily declining trend that predominated most of 2015 and 1H16.
  • With a surprise fall in Indian demand reported for September, the Indian growth story appears to have lost some of its lustre. As with China, demand growth not only stuttered but also removed one of the key previous supports to global demand. Indian deliveries in September saw their first y-o-y decline in nearly one-and-a-half years, as lower industrial activity, rising prices, unrest in some provinces and heavy monsoon rains severely dampened demand.
  • Our in-depth analysis of the global vehicle fleet shows that the oil price declines of recent years did not have a uniform impact upon vehicle efficiency gains. The fuel economy of new light duty vehicles purchased in the US, for example, improved in 2015 but at a pace just one-third of that previously seen. The IEA’s recently published World Investment Report details similar slowdowns in India, Japan, South Africa, Korea, among others, but notably not in China and Germany. The IEA’s other recently published Energy Efficiency Market Report 2016 adds further clarity on how much oil consumption vehicle efficiency standards around the world have saved.

Supply

Summary

  • Global oil supply rose 0.8 mb/d month-on-month in October to 97.8 mb/d as both OPEC and non-OPEC output increased. World oil production was 0.8 mb/d above a year ago, with higher OPEC production more than offsetting non-OPEC declines.
  • OPEC crude output rose by 230 kb/d to a record 33.83 mb/d in October after production recovered in Nigeria and Libya and supply from Iraq reached the highest level ever. Iran pushed flows to a pre sanctions rate of 3.72 mb/d, while Saudi Arabia, the UAE and Kuwait continued to pump near - or at - all-time highs. Output from the group’s 14 members has climbed for five months running, led by Iraq and Saudi Arabia. In October, OPEC supply stood nearly 1.3 mb/d above a year ago.
  • OPEC’s record-smashing performance comes ahead of its 30 November meeting, where oil ministers will try to implement a deal struck in Algiers to cut output to between 32.5 mb/d and 33 mb/d. OPEC technical experts are still working on a mechanism to allocate individual supply targets. Production in October ran 830 kb/d above the upper range of the output target, and early indications are that the elevated levels will continue in November.
  • The forecast for non-OPEC oil supply growth in 2017 has been revised up by 110 kb/d since last month’s Report to just shy of 0.5 mb/d due to an improved outlook for Russian output. Russia is now forecast to grow by 190 kb/d in 2017, following gains of 230 kb/d in 2016. Other significant contributors to growth next year will be Brazil (+280 kb/d), Canada (+225 kb/d) and Kazakhstan (+160 kb/d). Non-OPEC production is still forecast to decline by 0.9 mb/d in 2016.
  • Non-OPEC oil supply rose by 485 kb/d in October, to 57 mb/d, on a recovery in output from the North Sea and on higher Russian and Kazakh flows. A marginal increase is also forecast for US oil production, on lower outages in the Gulf of Mexico and as declines in tight oil output eased. Total non-OPEC supplies were 690 kb/d below a year earlier in October, with lower supplies in the US, the North Sea, China, Colombia and Mexico offset by gains in Kazakhstan, Brazil and Russia.

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

OECD stocks

Summary

  • OECD commercial inventories fell for the second month in a row in September, by 17.1 mb to 3068 mb. Taken together, OECD stocks in August-September fell the most in nearly three years.
  • Falls were concentrated in oil products in September as the refinery maintenance season was in full swing. Crude stocks fell 1.7 mb because of North America, with gains seen in Asia Pacific and Europe.
  • Chinese crude stocks built by a strong 29.7 mb in September and 84.4 mb over 3Q16, up by a cumulative 328 mb over the past 12-month period.
  • Preliminary data point to renewed crude stock builds in the US and Japan in October, while elsewhere refinery maintenance is likely to have capped oil product stock builds. Unless OPEC agrees an output cut at its next meeting, stock builds could continue throughout 2017.

Prices

Summary

  • Benchmark crude prices followed a bell-shaped curve in October, rising in the first part of the month before erasing nearly all of those gains on doubts about the likelihood of an OPEC production agreement. At the time of writing, front-month ICE Brent was trading at $46.79/bbl.
  • Rising production of light sweet crude and lower demand from European refiners put pressure on the Brent complex, which fell relative to Dubai and West Texas Intermediate.
  • Oil product prices rose in tandem with lower production from refiners. The gains were particularly strong in European and Asian gasoil, naphtha and fuel oil markets. US New York Harbour spot gasoline prices were supported in early November by the temporary shutdown of part of the Colonial pipeline.
  • VLCC freight rates rose strongly in October in line with strong crude exports from the Middle East, while the Suezmax and Aframax markets performed less well.

Refining

Summary

  • Global refinery throughput is expected to fall by a seasonal 1 mb/d in 4Q16 to 78.9 mb/d, up by 150 kb/d year on year (y-o-y).Refinery runs reached a record 79.9 mb/d in 3Q16, a modest 190 kb/d up from 3Q15.
  • Despite a slight upward revision, forecast annual growth of 270 kb/d for 2016 is still the lowest increase in more than a decade. Refiners are uninspired with margins lower from 2015 peaks and product stocks still at more than comfortable levels.
  • Our forecast for January and February sees runs growing 670 kb/d y-o-y on average.This is higher than what we observed in recent months, but still lower than the demand growth rate.