- Oil futures prices for Brent rose above $112/bbl on 12 June, the highest level this year, in the wake of a bold military campaign by Sunni insurgents in Iraq and continued supply outages in Libya. An apparent build in China's crude strategic reserve in April and May, at an average 1.2 mb/d, is also strengthening markets.
- Global oil demand is forecast to rise by 1.3 mb/d in 2014, to 92.8 mb/d, a modest acceleration on 2013 as the macroeconomic backdrop improves. Global oil demand is set to increase sharply from a low of 91.4 mb/d in 1Q14 to a high of 94 mb/d in 4Q14.
- Global supplies rose 530 kb/d in May, to 92.6 mb/d, mostly on an increase in non-OPEC production of 440 kb/d. On a yearly basis, world output was up 1.0 mb/d for the month, as non-OPEC growth of 2.1 mb/d compensated for OPEC declines.
- OPEC supplies inched up by 85 kb/d to 29.99 mb/d in May, with increased Saudi output offsetting declines in Libya. The 'call' on OPEC crude and stock changes has been raised by 150 kb/d for 2H14 to an average 30.9 mb/d.
- OECD industry stocks built by 39.8 mb, twice the seasonal average, to stand at 2 624 mb by end-April. As a result, the deficit to average levels was reduced to 77 mb, its narrowest since October 2013. Preliminary data indicate a further strong 37.4 mb build in May.
- Global refinery crude demand fell to a seasonal low of 75.9 mb/d in April on maintenance and weak margins. OECD runs were stronger than expected, rising by 470 kb/d year-on-year, their first annual gain since June 2013. Global runs are set to increase seasonally through August, averaging 76.5 mb/d in 2Q14 and 77.8 mb/d in 3Q14.
Iraq fighting rekindles market concern
As per the norm for this time of year, the June edition of the Oil Market Report (OMR) is an abridged one, with statistical data only, due to the release of the annual Medium-Term Oil Market Report (MTOMR) on 17 June. Subscribers can still access online a complete set of accompanying Monthly Oil Data Services (MODS) statistics. The OMR will return to its regular format with the July edition.
Forecast changes in OPEC production capacity loom large in any medium-term oil market outlook, and MTOMR 2014 is no exception: according to its projections, roughly 60% of the growth in OPEC crude production capacity for the rest of this decade will come from Iraq. But while Iraq's production potential is huge, so are the political hurdles it is facing - and nothing provides a clearer example of that risk than the military campaign launched on 9 June by Sunni insurgents and the significant gains it promptly achieved in the country's north. News of the lightning advance sent Brent prices above $112/barrel at the time of writing, a gain of roughly $2.50/barrel from previous levels and their highest level for the year.
Perception of heightened political risk in North Africa and the Middle East and chronic disruptions in Libyan exports have been a feature of the market for some time, but so far have been largely offset by record growth in non-OPEC supply. Recently, high crude imports into China, likely for expanding the country's strategic reserves, also have pulled as much as 1.2 mb/d of additional crude demand in April and May, roughly equivalent to the current losses in Libyan production versus pre-Civil War levels, providing additional support to markets.
Concerning as the latest events in Iraq may be, they might not for now, if the conflict does not spread further, put additional Iraqi oil supplies immediately at risk. Production from the north of the country, averaging around 250-300 kb/d in 2013-early 2014, had already been off the market since early March due to violence in Anbar province and attacks on the Kirkuk-Ceyhan pipeline linking supply from Iraq's northern fields to world markets via Turkey. Supply from the south of the country, in contrast, had been on the rise. As Iraq managed to lift production to 30-year highs this year, all of its exports since March have come from southern terminals near Basrah. But prospects of a return of the Kirkuk-Ceyhan pipeline now only look even more elusive, and the situation of the ground, at the time of writing, remained highly fluid. At OPEC's regular ministerial meeting in Vienna on 11 June, the group agreed to maintain the 30 mb/d production target for 2014. The loss of supplies from Iraq and Libya, where volumes have fallen below 100 kb/d in early June from 1.4 mb/d a year ago, have combined to shift market attention to Saudi Arabia, the group's largest holder of spare capacity and widely acknowledged as the reliable "central banker" of the oil market. "Effective" spare capacity is estimated at 3.31 mb/d, with the Kingdom holding 80% of the surplus volumes.
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 May 2011, 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. This totals -200 kb/d to -400 kb/d for non-OPEC as a whole.