Oil Market Report: 11 October 2016

Download full reportDownload tables

Highlights

  • Global oil supply rose by 0.6 mb/d in September, with non-OPEC up nearly 0.5 mb/d on higher Russian and Kazakh flows and OPEC at an all-time high.World oil output of 97.2 mb/d was up 0.2 mb/d on a year ago due to strong OPEC growth. Non-OPEC supply is forecast to drop by 0.9 mb/d in 2016 before rebounding by 0.4 mb/d in 2017.
  • OPEC crude output rose by 160 kb/d to a record 33.64 mb/d in September as Iraq pumped at the highest ever and Libya reopened ports.Supply from the group stood 0.9 mb/d above 2015 due to robust Middle East output. OPEC has agreed to cut supply to between 32.5 mb/d and 33 mb/d, with details to be set by end-November.
  • Demand is forecast to expand by 1.2 mb/d this year, with a similar gain expected in 2017.Growth continues to slow, dropping from a five-year high in 3Q15 to a four-year low in 3Q16 due to vanishing OECD growth and a marked deceleration in China. The potential for colder weather should see growth rebound somewhat in 4Q16.
  • OECD commercial inventories fell for the first time since March, by 10 mb to 3 092 mb in August due to a larger than seasonal decline in crude stockpiles. Preliminary data for September show crude stocks falling in both Japan and the US.
  • Weighed down by autumn maintenance, global refinery throughput in 4Q16 is expected to decline seasonally by 1.1 mb/d, up just 70 kb/d year on-year. Global throughput in 2016 is expected to grow y-o-y by just 220 kb/d, the lowest annual growth rate in more than a decade, excluding the last economic recession.
  • Benchmark crude prices rose in September as market rebalancing continued and participants anticipated an OPEC supply cut.At the time of writing, front month ICE Brent was trading at $53.05/bbl with front month NYMEX WTI lower at $51.15/bbl.

SETTING LIMITS

The waiting game is over. OPEC has effectively abandoned its free market policy set in train nearly two years ago. Global oil inventories are far too high - in the view of some producers – and they aren’t being worked off nearly fast enough. To speed up the process, OPEC agreed on 28 September to cut production. The price of oil has risen by 15% to more than $53/bbl since the deal, the first to cut supply since 2008.

Now the real work starts. Apart from setting a supply target of between 32.5 mb/d and 33 mb/d, other critical details – like individual country allocations, production baseline and implementation date – need to be finalised when OPEC meets on 30 November. Iran, Libya and Nigeria – all aiming to raise output - are said to be exempt from cuts. A significant rebound in supply from Libya and Nigeria and further growth from Iran would suggest that bigger cuts would have to be made by others, such as Saudi Arabia, to meet the new output target. Our estimate for September shows crude supply from the group’s 14 members climbing to 33.6 mb/d – an all-time high. The extent of any cooperation from non-OPEC producers such as Russia is still to be determined.

To be sure, the rapid rise of US light tight oil (LTO) and OPEC’s free-wheeling strategy triggered dramatic changes in the world of oil. The price of crude fell from triple digit highs to below $50/bbl. Lower prices at the pump initially fuelled strong gains in demand, but growth has since slowed markedly after subsidy cuts in emerging markets, economic headwinds in some countries and demand saturation in the developed world. On the supply front, relentless growth from non-OPEC – particularly US LTO – has swung into contraction, as forecast in our previous reports. At the same time, production from OPEC – driven mainly by low-cost Middle East supply – has risen to all-time highs. The net result is a massive oil inventory overhang that is keeping the market under pressure.

The current price of oil has caused discomfort for all producers – even those with hefty financial reserves, such as Saudi Arabia. For high-cost non-OPEC producers the pain has been especially acute. The impact of steep investment cuts made in 2015 is being felt now: nearly 0.9 mb/d has been lost since a year ago. The lower price environment has also forced companies big and small to cut costs and do more with less. As a result, non-OPEC supply is expected to return to growth next year.

Even now, producers such as Russia are showing impressive resilience. So are Middle East OPEC countries whose record-smashing performance has raised the group’s oil output by 1.1 mb/d from a year ago. The converse is true for demand, with growth slowing from a five-year high in the third quarter of 2015 to a four-year low in the third quarter of this year.

Even with tentative signs that bulging inventories are starting to decline, our supply-demand outlook suggests that the market – if left to its own devices – may remain in oversupply through the first half of next year. If OPEC sticks to its new target, the market’s rebalancing could come faster.

Demand

Summary

  • World oil demand will grow by 1.2 mb/d this year, with a similar expansion expected in 2017. The growth estimate for 2016 has been trimmed by 40 kb/d, while the absolute demand estimate was raised by 155 kb/d. Baseline adjustments, mainly to 2015 US data, lifted absolute demand but curbed expected growth in 2016.
  • Global demand growth continues to slow, dropping from a five-year high of 2.5 mb/d in 3Q15 to a four-year low of 0.8 mb/d in 3Q16 due to vanishing OECD growth and a marked deceleration in China. After unusually mild winter weather in much of the northern hemisphere in 4Q15, year on year (y-o-y) growth should rebound somewhat in 4Q16 (+1.4 mb/d).
  • Much weaker-than-expected US oil demand data for July pulled down the estimate of overall demand for the third quarter and for the whole of 2016.Growth estimates fell heavily (-415 kb/d in July, y-o-y), as upgrades to the baseline series further reduced year-on-year (y-o-y) comparisons.
  • Chinese oil demand growth has all but vanished in 3Q16 compared to a year ago, pulled down by a substantial slowdown in industrial oil usage. Some of the slowdown may be temporary due to forced factory closures ahead of September’s G20 meeting in Hangzhou, but the heady gains seen as recently as mid-2015 are unlikely to be repeated any time soon.
  • Exceptionally weak estimates of Saudi Arabian ‘other product’ demand due to subdued seasonal power sector demand pulled the overall metric down in y-o-y terms for a fourth consecutive month in July.
  • Indian demand growth returned with a vengeance, according to preliminary August data (+420 kb/d). Strong gains in road transport demand and residential LPG use lent support, more than offsetting declines in naphtha and kerosene.
  • A surprising uptick in Russian demand gathered pace in August despite an ailing economy and ongoing recessionary conditions. Russian demand broke through 4 mb/d for the first time ever, rising by just over 4% y-o-y in August, despite a recession that has lasted since mid-2014.

Supply

Summary

  • Global oil supplies rose by 0.6 mb/d in September to 97.2 mb/d. Non-OPEC production was up by nearly 0.5 mb/d on higher Russian and Kazakh flows, while OPEC crude output rose to a record high. After hefty declines in August, global oil supply in September was 0.2 mb/d higher than a year ago.
  • OPEC crude output rose by 160 kb/d to an all-time high of 33.64 mb/d in September as Iraq pumped at record rates and Libya reopened export terminals. Saudi Arabia, Kuwait and the UAE held supply at or near historic highs, while Iran sustained pre-sanctions levels of close to 3.7 mb/d. Output from the group’s 14 members stood 0.9 mb/d above a year ago due to the strong Middle East performance.
  • OPEC has agreed to cut output to between 32.5 mb/d and 33 mb/d – the group’s first deal to reduce supply in eight years – in a bid to speed the market’s rebalancing. Details, including individual country targets, are expected to be finalised when ministers gather at a scheduled meeting on 30 November. Libya, Nigeria and Iran are said to be exempt from supply cuts.
  • Production from non-OPEC surged by nearly 0.5 mb/d in September to 56.6 mb/d as Russian crude output soared to a post-Soviet high and Kazakh volumes recovered from maintenance. September production was nevertheless 0.9 mb/d below a year ago due to sharp declines in the US and China.
  • Non-OPEC supply is forecast to decline by 0.9 mb/d in 2016 before rebounding by 0.4 mb/d in 2017, largely unchanged from last month’s Report.

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

OECD stocks

Summary

  • OECD commercial inventories fell for the first time since March, by 10 mb to 3 092 mb, in August due to a larger than seasonal decline in crude stockpiles.
  • Asia Oceania saw the largest monthly draw in crude stocks. The decline was split between Japan and South Korea, which saw higher refinery runs.
  • Oil product inventories built by 18.7 mbto reach a historical high in August as OECD refinery throughput rose and seasonal restocking of US propane continued.
  • Preliminary data for September show crude stocks falling in both Japan and the US due to lower imports and despite a heavier refinery maintenance schedule.

Prices

Summary

  • Benchmark crude prices rose in September as market rebalancing continued and participants anticipated an OPEC supply cut. At the time of writing, front month ICE Brent was trading at $53.05 /bbl with front month NYMEX WTI lower at $51.15/bbl.
  • Major crude benchmarks remained locked in contango during September, reflecting continuing oversupply in physical markets.
  • Gasoline, naphtha and fuel oil prices all strengthened on open arbitrage to the US East Coast and Singapore, while middle distillates were more stable.
  • Crude freight rates recovered from the lowest level since 2009 on stronger activity in the North Sea and West Africa. Clean product freight rates were largely stable, with the exception of Atlantic Basin clean routes, which responded to an outage on the Colonial pipeline.

Refining

Summary

  • Weighed down by autumn maintenance, global refinery throughput in 4Q16 is expected to decline seasonally by 1.1 mb/d to 78.9 mb/d, up only 70 kb/d year-on-year (y-o-y). The estimate for 3Q16 – though still at a record 80 mb/d - has been revised down by 420 kb/d, modestly above peak levels in 3Q15.
  • • Global throughput in 2016 is expected to grow y-o-y by just 220 kb/d, the lowest in more than a decade, excluding the last economic recession (See Crouching refiners, hidden stockbuilds). Our first forecast for 2017 offers a more optimistic outlook, with January runs expected to increase to almost 81 mb/d – a rise of 600 kb/d from December and up 1.2 mb/d y-o-y.