Oil Market Report: 12 October 2012

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Highlights

  • Crude oil prices traded in a narrow range in September, as renewed concerns about the economy blunted the effect of escalating tensions in the Middle East. Brent averaged $113.03/bbl and WTI $94.56/bbl, a gain of about $0.40/bbl. Brent rose a further $2/bbl in early October, to $115/bbl at the time of writing.
  • Estimates of global demand growth were revised down to 0.7 mb/d for 2012 (to 89.7 mb/d) but kept at 0.8 mb/d for 2013 (to 90.5 mb/d). The IMF's downward revision to its forecast of economic growth - to 3.3% in 2012 and 3.6% in 2013 - had been anticipated and does not affect our forecast.
  • Non-OPEC output growth is expected to bounce back to 0.7 mb/d in 2013 (to 53.9 mb/d) after outages cut growth to 0.4 mb/d (to 53.2 mb/d) in 2012. Both estimates are up by a marginal 10 kb/d since last month. Supply recovers by 0.6 mb/d (to 53.6 mb/d) in 4Q12, from maintenance and hurricane disruptions in 3Q12.
  • OPEC crude oil supply fell to an eight-month low in September, down 510 kb/d to 31.17 mb/d. Higher supplies from Iraq and Libya failed to offset reduced output from Nigeria, Iran and Saudi Arabia. Weak demand cut 'call on OPEC crude and stock change' by 400 kb/d for 3Q12, to 30.7 mb/d.
  • OECD industry stocks declined by a counter-seasonal 11.2 mb in August led by a stronger-than-seasonal draw in the US after Hurricane Isaac disrupted production and imports end-month, but preliminary data suggest stocks rebounded by 13.0 mb in September. Forward demand cover stands at 58.8 days, 0.1 days lower than July.
  • Global refinery crude demand estimates have been revised up by 140 kb/d for 3Q12, to average 75.8 mb/d. Robust refinery margins lifted runs in Europe, more than offsetting lower-than-expected US runs in September. In contrast, 4Q12 throughputs have been lowered by 250 kb/d, to 75.4 mb/d, on outages and a lower demand outlook.

In search of the new normal

This month's OMR is shorter than usual and reduced to its statistical content, as it coincides with the release of the Medium-Term Oil Market Report (MTOMR) 2012. (A complete set of accompanying MODS statistics is also available this month.) We will return to the normal OMR format, fully loaded with commentary and analysis, in November.

This is a good time to be looking at the mid-term horizon, since so much has changed in the oil market, the global economy and the world at large in the 16 months since our last full five-year outlook (an update was issued in December). The net result of those changes - in particular, an expected rebuilding of OPEC spare capacity -- could be said to signal a return to more 'normal' market conditions than we had become accustomed to. Yet as outlined in the MTOMR, this rebalancing of supply and demand will be accompanied with such sweeping changes in regional balances that it is more likely to feel like uncharted territory than familiar ground.

Recent market developments - the usual focus of the OMR - already feel anything but normal.  Stock movements and refining activity are making a mockery of seasonal patterns. Heating oil futures are in backwardation, discouraging inventory building at a time of year when Northern Hemisphere market participants would typically be stockpiling. Oil prices in general remain elevated, and in parts of North America retail product prices are spiking near record highs, yet preliminary data suggest OECD oil stocks built counter-seasonally last month. In Europe, refiners, buoyed by a dramatic turnaround in refining margins, have been postponing seasonal maintenance and, despite much lower processing capacity than last year, are pushing far more crude through the system.

The clearest departure from 'business as usual' may be the reduction in Iranian exports since July as a result of expanded international sanctions. Whereas many expected the sanctions to lose some bite in September, as Iranian exporters and some of their clients were reportedly seeking ways to get around insurance constraints, in fact compliance appears to have tightened, and Iranian crude deliveries fell to an estimated 860 kb/d, a new low.

It looked last month as if the loss of Iranian supplies might have something to do with a counter-seasonal draw in OECD oil stocks in August. Preliminary data for September do not support that view. Total OECD oil stocks rebounded last month, rising by a provisional 13 mb, compared to an average 21 mb draw in the last five years.  Stocks surged by nearly 10 mb in the US (compared to an average 1.5 mb build), barely edged lower in Europe (compared to an average 19 mb draw) and built by 5 mb in Japan (compared to a 3.4 mb draw). Product stocks were more of a mixed bag, however, falling by 3.3 mb in the US, three times as fast as normal, but building by nearly 2 mb in Europe on strong refinery runs, instead of the average 11.4 mb draw.

The paradox is that US product stocks have been falling faster than normal and European refiners have been running flat out despite tepid product demand in both markets. Hurricane disruptions and a string of refinery glitches (especially on the West Coast) are only part of the US story. In both regions, the bottom line is that exports have become a key driver of refining activity and profits, not just the outlet for surplus product that they used to be. To wit, in Europe even gasoline cracks have staged a dramatic recovery, despite vanishing demand at home.

How long European refining margins can remain at their current high levels in unclear. Despite pockets of concern, though, chances are market signals will work and supply and demand will balance, albeit in new and ever-changing ways. In a rapidly globalising product market, the adequacy of seasonal product stocks in any given market is getting increasingly hard to gauge. And judging from the shifts forecasted in the MTOMR, this is just the beginning.

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Supply

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All world oil supply figures for August discussed in this report are IEA estimates. Estimates for OPEC countries, some US states, and Russia are supported by preliminary September supply data.

Note:  Random events present downside risk to the non-OPEC production forecast contained in this report. These events can include accidents, unplanned or unannounced maintenance, technical problems, labour strikes, political unrest, guerrilla activity, wars and weather-related supply losses. Specific allowance has been made in the forecast for scheduled maintenance in all regions and for typical seasonal supply outages (including hurricane-related stoppages) in North America. In addition, from July 2007, a nationally allocated (but not field-specific) reliability adjustment has also been applied for the non-OPEC forecast to reflect a historical tendency for unexpected events to reduce actual supply compared with the initial forecast. After heavy outages seen in 2011 and 2012, this adjustment now totals ?500 kb/d for non-OPEC as a whole, with most downward adjustments focused in the OECD.

OECD Stocks

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Refining

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