Oil Market Report: 12 October 2017

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Highlights

  • Following very strong year-on-year demand growth of 2.2 mb/d in 2Q17, the pace slowed to 1.2 mb/d in 3Q17, reflecting relatively weak July and August data and the impact of hurricanes in September. Our forecast of global demand growth remains unchanged at 1.6 mb/d in 2017 (or 1.6%) and 1.4 mb/d in 2018 (or 1.4%).
  • Global oil supply rose 90 kb/d in September to 97.5 mb/d as non-OPEC output edged higher. Output stands 620 kb/d higher than last year. In 2017, non-OPEC supplies are expected to grow by 0.7 mb/d, followed by a 1.5 mb/d increase in 2018.
  • OPEC crude output was virtually unchanged in September as slightly higher flows from Libya and Iraq offset lower supply from Venezuela. Output of 32.65 mb/d was down 400 kb/d on a year ago. Compliance with supply cuts for the year-to-date is 86%.
  • OECD commercial stocks fell 14.2 mb in August from an upwardly revised July. The surplus over the five-year average fell to 170 mb. Global stocks are likely to have drawn in 3Q17 as reductions in floating storage and the OECD outweighed net builds in China.
  • Benchmark crude prices rose by $2-4/bbl in September versus August, marking the third straight month of gains. Middle distillate prices increased almost twice as fast as crude, reflecting lower refinery throughputs and higher demand.
  • For 4Q17, our refinery throughput forecast edges up to 80.9 mb/d, up 0.1 mb/d quarter-on-quarter. Our first forecast for January 2018 implies 1.2 mb/d year-on-year growth, although runs decline by 0.4 mb/d from December to just under 82 mb/d.
  • Our global crude and product balances show inventories drawing in 2017 by 0.1 mb/d and 0.2 mb/d, respectively. For next year, the crude and product markets look broadly balanced, assuming OPEC holds output steady at around current levels.

Building on success

Over the last few months, questions lingered about whether producers were seriously committed to their agreement to cut output and balance the market ("All in it together?," OMR August 2017). While there may still be doubts about some of them, the market heavyweights have once again walked into the ring. A few weeks ahead of the next OPEC meeting, Saudi Arabia and Russia have strengthened their relationship with a high level summit, and a series of investment agreements accompanied by statements suggesting that the current oil output cuts might be tightened. Of course, we must wait and see what happens. But there is little doubt that leading producers have re-committed to do whatever it takes to underpin the market and to support the long process of re-balancing.

The backdrop to these high-level manoeuvers is the recent volatility we have seen in the Brent crude market, with prices coming close to the symbolic level of $60/bbl before retreating to $57/bbl. Uncertainty with some suppliers (Libya, Venezuela, Iran and northern Iraq) and signs of possibly slower than expected growth in US shale production, coupled with strong oil demand, provided upward momentum to the market. Producers looking for higher prices were on the verge of declaring victory. The number of net long positions held by money managers in Brent futures rose to their highest-ever level through September. However, more recently, enthusiasm has peaked and profit taking has set in. For WTI, the mini bull run was more limited because logistical constraints saw crude oil stocks increase at Cushing, causing the discount to Brent to blow out to nearly $7/bbl from only $2/bbl in June. Even the huge increase in US crude oil exports in late September to a record level of close to 2mb/d only increased the value of WTI versus Brent by about 95 cents/bbl. Markets have a tendency to over-shoot during headline-heavy periods, which is probably what we saw with Brent.

Meanwhile, detailed analysis of the global balance shows that in 2017 each quarter will show a deficit, other than a tiny build in 1Q17, and, for the year as a whole, stocks will fall by 0.3 mb/d. This assumes OPEC crude oil production remaining at 32.7 mb/d. Data is of course subject to revision, but we can now clearly see a major reduction in floating storage, oil in transit, and stocks held in some independent areas. In the OECD, the five-year average stock overhang is now down to 170 mb from 318 mb at the end of January and stocks have fallen in months when they normally increase, offsetting net builds in China. In the case of China, there is always a margin for error in data that is often derived rather than reported, but crude imports have fallen every month since June and the implied net build for China's stocks in September was relatively small at 100 kb/d.

Looking into 2018, we see that three quarters out of four will be roughly balanced -- again using an assumption of unchanged OPEC production, and based on normal weather conditions. However, our current numbers for 1Q18 imply a stock build of up to 0.8mb/d. Taking 2018 as a whole, oil demand and non-OPEC production will grow by roughly the same volume and it is this current outlook that might act as the ceiling for aspirations of higher oil prices. Leading oil producers will have looked at their market balances and probably drawn the same conclusion. The next few weeks ahead of the producers' meeting in Vienna on 30 November will be crucial in shaping their decision on output. A lot has been achieved towards stabilising the market, but to build on this success in 2018 will require continued discipline.

Demand

Summary

  • After the very strong year-on-year growth of 2.2 mb/d seen in 2Q17, oil demand growth returned to more normal levels in July/August. Demand increases in OECD countries were moderate in July and preliminary data point to a further slowdown in August. Non-OECD growth continued to slow, more or less in line with our forecast.  As a result, our overall outlook remains roughly unchanged, with small revisions to historical data offsetting each other. We forecast global demand growth of approximately 1.6 mb/d in 2017 (or 1.6%) and 1.4 mb/d in 2018 (or 1.4%).
  • Following the strong performance seen in 2Q17, growth slowed to 1.2 mb/d in 3Q17, reflecting relatively weak July and August (preliminary) data and the expected impact of hurricanes Harvey and Irma in September. Demand is expected to bounce back in 4Q17, expanding by 1.7 mb/d year-on-year (y-o-y), assuming normal northern hemisphere winter temperatures.
  • US July data were weaker than seen recently, showing demand growth of 250 kb/d y-o-y after an increase of 650 kb/d in June. Gasoline demand was slightly below last year for the first time in four months. LPG/ethane demand rose by 100 kb/d y-o-y after posting an increase of 240 kb/d in June.
  • According to domestic data, German oil consumption declined by 100 kb/d y-o-y in August, on lower naphtha deliveries. Gasoil demand growth slowed to 70 kb/d y-o-y. French deliveries dropped by 35 kb/d in August and Italian demand ended up slightly below last year.
  • Chinese demand rose by 310 kb/d y-o-y in August, supported by an increase in naphtha and other product demand. Growth continues to slow, and both gasoline and gasoil apparent demand contracted in August.
  • Indian demand dropped by 210 kb/d y-o-y in August, on exceptional weather conditions. LPG was the only product posting positive growth.

Supply

Summary

  • Global oil supply rose 90 kb/d in September as non-OPEC output edged higher. Ongoing non-OPEC growth left output of 97.5 mb/d standing 620 kb/d above a year ago.
  • OPEC crude output was virtually unchanged in September as slightly higher flows from Libya and Iraq offset lower supply from Venezuela. Output of 32.65 mb/d, just a touch up on August, was down 400 kb/d on a year ago, when OPEC started its run of record output. Compliance with the supply cuts remained strong at 88% for September and 86% for the year-to-date.
  • Combined production from Libya and Nigeria, both exempt from supply cuts, is up 730 kb/d from springtime lows. Their rebound has diluted OPEC's supply cut.
  • Non-OPEC supplies edged 80 kb/d higher in September as scheduled and unscheduled outages continued to constrain production. Output nevertheless stood 975 kb/d higher than a year ago, with gains stemming from the US, the North Sea and Kazakhstan, while increased production from Congo and Ghana also contributed. Mexico and Russia saw the largest year-on-year declines.
  • Non-OPEC oil supply is forecast to expand by 0.7 mb/d in 2017 and a further 1.5 mb/d in 2018 to reach 59.6 mb/d. The US will be the largest contributor to growth in both 2017 and 2018, adding 470 kb/d and 1.1 mb/d, respectively.

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

Stocks

Summary

  • OECD commercial stocks decreased 14.2 mb in August to 3 015 mb and continued to fall against the five-year average on higher-than-expected demand. July stocks were revised 13.1 mb higher.
  • Hurricane Harvey led to a partial reversal of the trends seen in previous months in the US, with an increase in crude stocks and a large oil product draw, particularly for diesel. The crude stock build was not as much as implied by the loss of refining capacity following the storm, as trade quickly adapted.
  • Preliminary data for September show oil stocks drawing everywhere, from Europe to Fujairah, Japan, Singapore, the US and floating storage.
  • Global oil stocks are likely to have drawn in 3Q17 for only the second time since 2014, as reductions in floating storage and the OECD outweighed net builds in China. China's crude imports have fallen every month since June and the implied net build for September was relatively small at 100 kb/d.

Prices

Summary

  • Benchmark crude prices rose by $2-4/bbl in September versus August, marking the third straight month of gains. Higher oil product demand and political tensions in the Middle East contributed.
  • Money managers increased net long positions in crude futures to a near record at the end of September, reflecting stronger optimism about oil prices. Net long positions in global diesel futures skyrocketed following Hurricane Harvey.
  • Oil product markets were buoyant throughout the month. Middle distillate prices increased almost twice as fast as crude, reflecting lower refinery throughputs and higher demand.

Refining

Summary

  • Our estimate for 3Q17 refining throughput has been revised up by 0.4 mb/d to 80.8 mb/d, on higher European and OECD Asia crude runs. Year-on-year (y-o-y) growth reaches 0.7 mb/d.
  • Our forecast for 4Q17 sees global refinery intake edging up 0.1 mb/d quarter-on-quarter (q-o-q), to 80.9 mb/d, up 0.9 mb/d y-o-y. From September to December, global refining throughput is expected to increase by 2.9 mb/d. 
  • The global increase in refining margins caused by Hurricane Harvey has largely vanished, but margins remain at comfortable levels. Global refined product markets look balanced in 4Q17, after draws in 2Q17 and 3Q17.
  • Our first forecast for January 2018 implies 1.2 mb/d y-o-y growth, with large gains in non-OECD, although throughput declines by 0.4 mb/d from December levels to just under 82 mb/d.