Oil Market Report: 13 December 2016

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  • OPEC has agreed to cut output by 1.2 mb/d from January 2017 and secured a reduction of 558 kb/d from non-OPEC.As OPEC was deciding to cut production, its crude output in November was 34.2 mb/d, a record high, and 300 kb/d higher than in October. The group’s output stood 1.4 mb/d higher than a year ago.
  • Additional cuts in support of OPEC were agreed by non-OPEC countries, led by Russia. They are expected to curb 2017 growth from non-OPEC producers just over 0.2 mb/d from our previous estimate of 0.5 mb/d.
  • Global oil supplies in November edged up to a record high 98.2 mb/d, as a drop in non-OPEC output was more than offset by higher OPEC production.
  • Global oil demand growth of 1.4 mb/d is foreseen for 2016, 120 kb/d above our previous forecast. Robust 3Q16 US demand numbers and methodological changes for China were the main factors. Growth in 2017 is now seen at 1.3 mb/d.
  • OECD commercial inventories fell in October for the third month in a row. They have drawn 75 mb since reaching a historical high in July, but remain 300 mb above the five-year average. Product stocks have fallen twice as quickly as crude during that period. Preliminary data show stocks falling further across the OECD in November.
  • Refinery crude intake in 1Q17 is forecast to grow by only a modest 310 kb/d y-o-y, after growing by only 350 kb/d growth in 4Q16. The rally in crude prices following the announcement of coordinated OPEC/non-OPEC action may further squeeze refining margins, prompting product stock draws first on the way to market re-balancing.
  • Benchmark crude prices reversed their losses seen in November and rose by $10/bbl following the decision by OPEC and non-OPEC to cut output. Light sweet crude oil underperformed sour grades and this may well continue in the early part of next year. Fuel oil and naphtha were well supported due to higher Asian


The final Report of 2016 analyses events as dramatic as those that kicked off the year. The focus in January was on $30/bbl oil and the imminent increase in Iranian oil production after sanctions were lifted. In December, we are seeing the first proposed output cut by OPEC since 2008 – and the first deal including non-OPEC producers since 2001 – which marks a major departure from the market share policy followed for the past two years. OPEC’s cut to crude production of 1.2 mb/d almost matches its deliberate production increase of 1.3 mb/d in the twelve months to October (the month on which the OPEC cuts are based), while the non-OPEC group has seen its crude output fall in the same period by about 0.9 mb/d. Meanwhile, following revisions to Chinese and Russian data, we have raised our 2016 global net demand growth number to 1.4 mb/d and that for 2017 to 1.3 mb/d.

Before the agreement among producers, our demand and supply numbers suggested that the market would re-balance by the end of 2017. But OPEC, Russia and other producers are looking to speed up the process. If OPEC promptly and fully sticks to its production target, assessed at 32.7 mb/d, and non-OPEC producers deliver the agreed cuts of 558 kb/d outlined on 10 December, then the market is likely to move into deficit in the first half of 2017 by an estimated 0.6 mb/d. This is not a forecast by the IEA, it is an assumption based on the numbers in OPEC’s 30 November agreement, subsequently reinforced by the non-OPEC producers.

After the first half of 2017, the analysis is complicated by the fact that the proposed cut is for six months, and will be reviewed at the next OPEC ministerial meeting at the end of May. This can be seen as prudent given the underlying uncertainties in the oil market and the global economy but also a warning that production restraint might not be extended. The price curve reflects this with a sharp increase in short-term prices but shows relatively little movement further out. OPEC also appears to be signalling that high-cost producers should not take for granted that they will receive a free ride to higher production. These high-cost producers, who assume that the cuts at the very least guarantee a floor under prices, might think twice before taking the risk of sanctioning new investments.

Clearly, the next few weeks will be crucial in determining if the production cuts are being implemented and whether the recent increase in oil prices will last. For contractual and logistical reasons, we might initially see that the output cuts do not fall neatly into place. The deal is for six months and we should allow time for it to be implemented before re-assessing our market outlook. Success means the reinforcement of prices and revenue stability for producers after two difficult years; failure risks starting a fourth year of stock builds and a possible return to lower prices. What a difference a year makes!



  • This month’s Report includes net hikes in the respective growth estimates for both 2016 and 2017 following upgrades to the Chinese forecast, reductions in the previous Russian base and US September demand strength (effectively adding 140 kb/d to 3Q16 demand estimate). Global oil demand growth of approximately 1.4 mb/d is now forecast for 2016 and 1.3 mb/d in 2017, growth estimates respectively raised by 120 kb/d and 110 kb/d.
  • Ongoing research to improve our estimates of Chinese demand have resulted in the addition of approximately 135 kb/d to the 2016 Chinese demand estimate,to 11.9 mb/d. Our upwardly revised Chinese estimates better capture both the sharp 1H16 increases in imports of mixed aromatics (see Non-OECD, China section) and improved coverage of independent refinery activity.
  • Bringing together a near complete set of data for 3Q16, this month’s Report confirmed the forecast carried since March 2016 that global demand growth would reach a low in 3Q16. Indeed, over the nine months since the publication of that forecast the true 3Q16 year-on-year (y-o-y) growth rate turned out to be remarkably as forecast at the time, at +1.1 mb/d as opposed to the original forecast gain of +1.0 mb/d.
  • European gasoil demand continues to exceed expectations, supported by the surprising ongoing strength demonstrated by the European manufacturing sector, though signs of weakness have started to emerge. European gasoil/diesel demand increased by on average 60 kb/d y-o-y through the first nine months of 2016, but is forecast to decelerate to +20 kb/d in 4Q16. Although only a small sample size is currently available for 4Q16, and largely only German, French and Italian October demand, an average overall y-o-y decline of 65 kb/d is forecast.
  • Significant baseline revisions curbed historical estimates of non-OECD oil demand, largely stemming from Russia (following the extensive work carried out for the 2016 edition of the IEA’s World Energy Outlook). This removed on average 0.3 mb/d from the baseline non-OECD demand numbers, 2010-14. The negative feed-through is less in 2015-16 and flips to a net-upgrade in 2017, as offsetting upside Chinese adjustments filter through, which, along with the recent Russian demand strength shown in the latest monthly data, have added upside pressure on the 2016-17 global growth estimate.



  • Global oil supplies edged higher in November to 98.2 mb/d, as a drop in non-OPEC output was more than offset by higher OPEC production.Compared with a year earlier, global oil production was 470 kb/d higher, with OPEC increases more than making up for a 1.1 mb/d decline in non-OPEC output.
  • OPEC agreed to cut output by 1.2 mb/d from January 2017 and secured a reduction of 558 kb/d from non-OPEC (see OPEC’s comeback). Russia has pledged to cut by 300 kb/d (see Non-OPEC joins supply cuts).OPEC supply targets, set for the first time since 2008, leave Saudi Arabia bearing the brunt of the cut. Nigeria and Libya are exempt, Iran got a slight increase and Iraq was allocated its first supply target since 1998. Net importer Indonesia objected to the cut and suspended its membership.
  • OPEC crude output rose by 300 kb/d to a record 34.20 mb/d in November, just before the group struck its agreement to reduce supply. Angola, along with Libya and Saudi Arabia, led the increase. Kuwaiti output fell by 100 kb/d. Six straight months of rising output put November supply from the group’s 14 members 1.4 mb/d above a year ago.
  • The new OPEC output ceiling, which, for now, includes Indonesia, works out to 32.7 mb/d – below the “call” on OPEC crude throughout next year. If OPEC and its non-OPEC partners stick to their pledges, global inventories could start to draw in the first half of 2017. For its part, Saudi Arabia has notified customers of supply reductions from January and has signalled it may be prepared to cut output below 10 mb/d for the first time since February 2015.
  • Non-OPEC supply growth for 2017 has been revised down by 255 kb/d since last month’s Report to 220 kb/d after Russia and 11 other non-OPEC producers vowed to join OPEC’s cut and speed the market’s rebalancing. The outlook for Chinese and Mexican oil production has also dimmed. For 2016, non-OPEC supplies remain on track to decline by nearly 0.9 mb/d to 56.8 mb/d.
  • Non-OPEC oil production declined by 160 kb/d in November to 57.1 mb/d on seasonally lower global biofuels supply and after Norwegian output receded from October’s highs. November production is pegged 1.1 mb/d below a year earlier.



  • OECD commercial inventories fell in October for the third month in a row. They have drawn 75 mb since reaching a historical high in July, but remain 300 mb above the five-year average.
  • In October, falls were concentrated in oil products and took place across all OECD regions. Product stocks have fallen twice as quickly as crude since July due to the impact of refinery turnarounds.
  • Chinese crude stocks decreased in October for the first time since January with higher refinery production and lower crude imports, even if early data show a build in November.
  • Preliminary data show a fourth monthly draw in oil stocks in the OECD in November.



  • Benchmark crude prices reversed their losses seen in November and rose by a sharp $7/bbl in the aftermath of OPEC’s deal on 30 November to curb output.An agreement by non-OPEC countries to cut production on 10 December sent prices up a further $3/bbl to their highest level since July 2015.
  • Light sweet crude oil remained under pressure relative to sour grades and this may well continue in the early part of next year with lower production expected from OPEC members and Russia.
  • Oil product prices were boosted by refinery maintenance in the northern hemisphere. The cheapest oil products – fuel oil and naphtha – saw the largest price gains, driven by Asian demand.
  • Freight rates for both dirty and clean tankers rose in November, reflecting higher shipping movements and open price arbitrages in several regions.



  • We have raised our global refinery throughput forecast for 4Q16 by 200 kb/d to 79.1 mb/d, gaining 350 kb/d year-on-year (y-o-y). Autumn maintenance led runs to a 750 kb/d decline from 3Q16.
  • Our forecast for 1Q17 refinery runs implies a 30 kb/d y-o-y growth with positive impact from normal winter weather expected for product cracks. This incorporates a lower forecast for January and February for Europe and the US on expectations of lower crude supplies from the Middle East.
  • The recent announcement by OPEC of an output cut increases the uncertainty around refinery intake forecasts. If OPEC’s agreement is implemented, the global oil market is expected to re-balance in the first half of 2017, but it remains to be seen whether the markets will first clear the overhang of refined products or crude stocks.