Oil Market Report: 11 August 2017

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Highlights

  • New data for non-OECD countries for 2015 reduces global oil demand by an average 330 kb/d in 2015-2018. For 2017, growth has been revised up to 1.5 mb/d, with demand reaching 97.6 mb/d. In 2018, growth slows slightly to 1.4 mb/d when demand will be 99.0 mb/d. In 4Q18, demand will reach 100.1 mb/d.
  • In July, global oil supply increased by 520 kb/d versus June. It was the third consecutive monthly increase. Global supply is up 500 kb/d on a year ago.
  • Non-OPEC output is expected to expand by 0.7 mb/d in 2017 and 1.4 mb/d in 2018, including 0.6 mb/d and 1.0 mb/d, respectively, for the US. The ten non-OPEC countries cooperating with OPEC saw their compliance rate improve to 67% in July.
  • OPEC crude output rose by 230 kb/d in July to a 2017 high of 32.84 mb/d, led by a strong recovery in Libya. Output from the 12 members included in the output pact edged up, eroding the compliance rate to 75%, the lowest this year. Year-to-date compliance is 87%.
  • OECD industry stocks fell in June by 19.3 mb to 3 021 mb on strong refinery runs and oil product exports, but are still 219 mb above the five-year average. In 2Q17, global oil stocks drew by 0.5 mb/d, including 0.2 mb/d in the OECD. Provisional data shows further falls in July, including the largest monthly US crude stock draw for more than three years.
  • Benchmark crude prices rose by $1-2/bbl in July with higher crude demand from refiners and anticipated oil field maintenance. Sweet-sour spreads widened for the first time in four months. Strong demand and refinery outages in Europe boosted diesel and gasoline prices.
  • Refining throughput is expected to reach its annual peak in August, with runs at 81.4 mb/d. 3Q17 throughput is forecast to grow 0.9 mb/d y-o-y. Global refining activity will seasonally decline in September and October, before bouncing back in November.

All in it together?

The re-balancing of the oil market desired by the leading producers has been a stubborn process and it takes time for the numbers to confirm what many observers instinctively feel has already happened. Sure enough, new data suggests that in 2Q17 global stocks fell by 0.5 mb/d and preliminary data for July, particularly in the United States where stocks fell by 790 kb/d, is supportive. Even so, we must not forget that they are falling from a very great height in volume terms. At the end of 2Q17, OECD commercial stocks, which are the component of the global total for which we have the most visibility, stood at 3 021 million barrels, still more than 219 mb above the five-year average although they have now fallen below 2016 levels. As an exercise, if OECD stocks fell by 0.5 mb/d until the end of 1Q18 when the current output agreements expire they would still be about 60 mb above the five-year average.

There would be more confidence that re-balancing is here to stay if some producers party to the output agreements were not, just as they are gaining the upper hand, showing signs of weakening their resolve. The compliance rate with OPEC's output cut fell again in July to a new low of 75% from June's revised figure of 77%. For those non-OPEC countries acting in support, their compliance rate in July was 67%. Together, the twenty-two countries are producing about 470 kb/d in excess of their commitment. Some of them are clearly determined that the output agreements will succeed: Saudi Arabia has indicated that export levels in August will fall to 6.6 mb/d, and, according to recent reports, it will cut customer allocations in September. Other countries currently have very low compliance rates, although this can change. In passing, we must note that the current situation in Venezuela is being monitored closely with respect to any market impact should oil production and exports fall significantly.

Producers should find encouragement from demand, which is growing year-on-year more strongly than first thought. Our growth estimate for 2017 has been increased to 1.5 mb/d, including very strong data for 2Q17 when demand increased by 1.8 mb/d. We also expect relatively strong demand growth for 2018 of 1.4 mb/d. From the producers' viewpoint, strong growth reduces the stocks overhang when expressed in terms of days of forward demand cover: perhaps this is a more relevant measure than simple volume. However, there is a sting in the tail because recently notified changes to historical data suggest that demand in some developing countries was overstated. We have accordingly reduced our estimate of non-OECD demand for 2015 by 0.2 mb/d and for 2016 by 0.4 mb/d. The impact of carrying this lower demand base into 2017 against unchanged supply numbers is that stock draws later in the year are likely to be lower than first thought.

Even so, this does not dilute the importance of the message that the market is re-balancing. Brent crude oil prices have recently stabilised above $50/bbl following a period a few weeks ago when, as we said in last month's Report, there was "waning confidence" in the market. If re-balancing is to be maintained, the producers that are committed to seeing the task through to March 2018 need to convince the market that they are in it together. It is not entirely clear that this is the case today.

Demand

Summary

  • This month's Report incorporates new annual data for 2015 for non-OECD countries. Compared to last month, the absolute level of demand and its seasonality have been significantly modified. By contrast, the annual growth in oil demand for 2017 and 2018 is only slightly changed. We forecast demand growth of approximately 1.5 mb/d in 2017 (or 1.6%), as global demand averages 97.6 mb/d.
  • We continue to expect a slightly lower growth in oil demand for 2018, of 1.4 mb/d to 99 mb/d, coming almost exclusively from non-OECD countries.
  • Preliminary estimates of year-on-year (y-o-y) global oil demand growth remain strong in 2Q17, at 1.8 mb/d (1.9%). OECD growth continues to be stronger than expected, with solid gains in Germany and the US.
  • US May data were very strong, contrary to indications given by weekly data. The US DOE monthly data showed demand growth of 820 kb/d, the highest level for May recorded since 2007. Gasoline demand was up +155 kb/d y-o-y in May. Gasoil demand rose +225 kb/d y-o-y, benefitting from manufacturing production growth and increased freight transportation.
  • German oil consumption rose by 140 kb/d y-o-y in June, supported by a jump of +150 kb/d in gasoil deliveries. The gain follows a +180 kb/d increase in gasoil deliveries in May. These increases presumably reflect end-consumer stock building of heating oil ahead of the winter season amid low prices.
  • After a very strong May (+915 kb/d), Chinese oil demand growth slowed to +500 kb/d y-o-y in June. In this Report, we changed our methodology for estimating Chinese demand with little impact on the annual total but some changes to seasonality.
  • Indian demand growth slowed to +70 kb/d in June, after a strong May (+285 kb/d). LPG and gasoil demand remained strong, while kerosene demand was subdued.

Supply

Summary

  • Global oil supply climbed by 520 kb/d in July to 98.16 mb/d as non-OPEC and OPEC continued to pump more. A third straight month of gains pushed supply up 500 kb/d on a year ago.
  • OPEC crude output rose by 230 kb/d in July to a new 2017 high of 32.84 mb/d, led by a dramatic recovery in Libya, which is exempt from supply cuts. Output from the 12 members restricted by the output pact edged up, weakening compliance to 75%, the lowest rate this year.
  • Libya's recent strong performance and Nigeria's continued recovery account for 70% of a 960 kb/d increase in total OPEC output since March. This means that production from OPEC as a whole has been cut by only 230 kb/d.

  • Non-OPEC oil supply rose 0.2 mb/d to 58.3 mb/ in July as Canadian output recovered from outages and US crude production continued to trend higher. Gains were also seen in Brazil and Kazakhstan, lifting total output 510 kb/d above a year ago. Compliance with agreed output curbs improved to 67%, from a downwardly revised June level of 66%.
  • The forecast for non-OPEC supply growth for 2017 and 2018 is largely unchanged since last month's Report, rising 0.7 mb/d and 1.4 mb/d, respectively. The US is expected to account for the bulk of the gains in both years, increasing 0.6 mb/d on average this year and by just over 1 mb/d in 2018. Gains will also come from Canada, Brazil and Kazakhstan, which add a combined 0.6 mb/d in both years.
  • For the record, the incorporation of more complete historical data for a number of non-OECD countries for 2015 lifts the supply baseline by 45 kb/d. A downward revision to monthly US crude production data for 2016 provide a partial offset.
  • A slump in oil prices since the start of the year has led major US oil producers to scale back spending plans for 2017, even as they intend to pump more oil. Following two years of unprecedented decline, global upstream investment had been expected to increase modestly by a nominal 6% (3% in real terms) in 2017, led by a 53% rebound in spending on US light, tight oil resources.

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

Stocks

Summary

  • OECD industry stocks fell in June by 19.2 mb to 3 021 mb on strong refinery runs and oil product exports to non-OECD countries. For 2Q17, stocks fell 9.2 mb, showing a counter-seasonal trend.
  • Global oil stocks are likely to have drawn moderately in 2Q17 as falls in the OECD, oil in transit volumes, Fujairah, Singapore and Chinese commercial stocks more than offset builds elsewhere.
  • Preliminary data shows a further drop in stocks in July in the US and Fujairah. Floating storage volumes also fell, whereas stocks in Europe, Japan and Singapore increased.

Prices

Summary

  • Benchmark crude prices rose by $1-2/bbl on the month on average in July with higher crude demand from refiners and anticipated oil field maintenance in several regions.
  • Money managers increased net long positions in crude futures by 225 mb in July. There are now 3.8 long positions for every short held by this category of traders, close to the long-run average.
  • The price spread between light sweet crudes and heavy and sour grades widened slightly in July. However, this may be temporary due to maintenance, as the OPEC agreement remains in place.
  • Some regional markets have flipped into backwardation, showing that the process of destocking has started in parts of the global oil market. Oil products, rather than crude, have led the charge.

Refining

Summary

  • In 2Q17, OECD refiners, especially in the US and Europe, drove all of the global year-on-year (y-o-y) growth of 1.5 mb/d as throughput reached 80.3 mb/d.  
  • Global throughput in 3Q17 is forecast to ramp up by 0.8 mb/d from 2Q17 to 81.1 mb/d, with most of the seasonal increase coming from oil exporters in the FSU and the Middle East.
  • After a seasonal slowdown in September-October, global throughput is expected to return to above 81 mb/d in November with the start-up of new capacity in China and Vietnam. Runs in non-OECD countries will reach a new record high at just under 43 mb/d.