Oil Market Report: 14 December 2017

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Highlights

  • Our forecast for global demand growth remains unchanged at 1.5 mb/d in 2017 (or 1.6%) and 1.3 mb/d in 2018 (or 1.3%). Revisions have been made to data for Nigeria, Germany and Iraq. The baseline for oil demand has been raised by roughly 0.2 mb/d.
  • Global oil supply rose 0.2 mb/d in November to 97.8 mb/d, the highest in a year, on the back of rising US production. Output was nonetheless down 1.1 mb/d on a year ago when Russia and Middle East OPEC producers pumped at record rates. Non-OPEC supply is set to rise by 0.6 mb/d in 2017 and 1.6 mb/d next year.
  • OPEC crude supply fell in November for the fourth consecutive month to 32.36 mb/d, down 1.3 mb/d on a year ago. Output was lower in Saudi Arabia, Angola and Venezuela. Compliance with agreed cuts rose to 115%, the highest this year, and lifted the 2017 average to 91%.
  • OECD commercial stocks fell 40.3 mb in October to 2 940 mb, their lowest level since July 2015. They are now 111 mb above the five-year average. Chinese crude stocks likely fell in October for the first time in a year. Preliminary global stocks data for November shows a mixed picture.
  • Benchmark crude prices rose by $4-5/bbl on average in November and traded at their highest level in more than two years in early December. The extension of the OPEC/non-OPEC output cuts and, latterly, the closure of the Forties pipeline system were factors.
  • Global refinery throughput in 3Q17 reached a record high at 81.2 mb/d, even including the impact of Hurricane Harvey, but has fallen back in 4Q17 due to maintenance. Global margins declined in November, losing almost $1/bbl.

Happy new year?

This week's closure of the Forties pipeline network that carries about 400 kb/d of North Sea oil added momentum to Brent crude oil prices that have settled above $60/bbl since the end of October. For the time being, in response to the Forties pipeline incident, we have reduced our estimate for UK production in December by 300 kb/d, and we will revisit this as the situation becomes clearer. After the initial surge that understandably accompanies such a major supply disruption, the market has settled down again and, unless another dramatic event occurs in what remains of 2017, it looks as if the Brent crude price will average about $54/bbl for the year, an increase of twenty percent on 2016. For the producers at least, 2017 has been encouraging. Will this carry over into the New Year?



In trying to answer the question, we have been given an important signal by OPEC's decision on 30 November to extend their production cuts - assisted by ten non-OPEC producers led by Russia - until the end of 2018. In compiling our outlook, we assume that crude production from OPEC and its non-OPEC partners remains flat. This assumption is then laid alongside our forecast that the growth in global oil demand will be 1.3 mb/d, slightly down on the 1.5 mb/d we see in 2017.

On considering the final component in the balance - non-OPEC production - we see that 2018 might not be quite so happy for OPEC producers. Just as the OPEC oil ministers were sitting down in Vienna, our colleagues at the US Energy Information Administration released data showing that for September US crude oil output increased month-on-month by 290 kb/d to reach 9.48 mb/d, the highest monthly average since April 2015 and 928 kb/d above a year ago. Preliminary weekly data suggests that US production increased further into early December. Recently, US drilling activity and well completion rates have picked up again, suggesting higher production to come in a few months. Consequently, we have raised our annual growth forecast for total US crude oil to 390 kb/d this year and 870 kb/d for 2018. Impressive though this seems, according to recent investor updates, the new mantra in the US shale regions is "moderation", reflecting a desire to greet stronger prices as an opportunity to consolidate rather than to launch yet more headlong expansion. The flexibility and ingenuity of the shale sector raises challenges to forecasters. Even so, when our US outlook is added to expectations for the other producers, output from non-OPEC countries could rise by 1.6 mb/d in 2018, an increase of 0.2 mb/d to our forecast in last month's Report.

So, on our current outlook 2018 may not necessarily be a happy New Year for those who would like to see a tighter market. Total supply growth could exceed demand growth: indeed, in the first half the surplus could be 200 kb/d before reverting to a deficit of about 200 kb/d in the second half, leaving 2018 as a whole showing a closely balanced market. A lot could change in the next few months but it looks as if the producers' hopes for a happy New Year with de-stocking continuing into 2018 at the same 500 kb/d pace we have seen in 2017 may not be fulfilled.

Demand

Summary

  • In this Report, we have adjusted a number of demand assumptions. OECD economic growth and oil prices have been updated and historical data for Nigeria and Germany plus changes to our projections of Iraq's direct crude use have been incorporated. While the historical and forecast baselines have been raised by roughly 200 kb/d, growth in 2017 and 2018 is unchanged compared to last month. We continue to forecast growth of around 1.5 mb/d in 2017 (or 1.6%) and 1.3 mb/d in 2018 (or 1.3%).
  • After growth of +1.5 mb/d in 3Q17, world oil demand is expected to grow by 1.3 mb/d in 4Q17. Provisional data for Europe in October point to a slowdown and growth in 4Q17 is also expected to be restrained by lower direct crude use in Iraq.
  • US demand continued to contract in September, by 175 kb/d year-on-year (y-o-y), reflecting the impact of the hurricanes that hit the country. Gasoline demand fell 155 kb/d below last year's level and ethane demand dropped by 115 kb/d y-o-y.
  • German oil consumption declined by 200 kb/d y-o-y in October, on lower naphtha and gasoil deliveries. French deliveries also dropped by 70 kb/d in October but Italian demand rose by 25 kb/d.
  • Chinese apparent demand rose by 725 kb/d y-o-y in October - a slight slowdown compared with September's strong growth of 970 kb/d. Gasoline demand contracted, however, by 25 kb/d.
  • Indian oil demand growth slowed to 65 kb/d y-o-y in October after September's strong growth of 350 kb/d. Gasoil demand declined by 35 kb/d y-o-y. 

Supply

Summary

  • Global oil supply climbed 170 kb/d in November to 97.8 mb/d, the highest in a year, on the back of rising US production. Output was nonetheless down 1.1 mb/d on a year ago when Russia and OPEC's Middle East producers were pumping at record rates.
  • OPEC crude output fell 130 kb/d in November due to lower output from Saudi Arabia, Angola and Venezuela as well as tighter all-round compliance with supply cuts. A fourth straight month of declines left output at 32.36 mb/d, down 1.3 mb/d on a year ago when OPEC produced at its highest ever level. Compliance rose to 115% in November, the highest since the agreement came into force in January, and lifted the 2017 average to 91%.
  • OPEC and non-OPEC participants agreed to extend supply cuts through 2018, with an option to review the policy in June. Output restraint has reduced the overhang in inventories and a 4Q17 requirement of 32.9 mb/d for OPEC crude implies a continued stock draw. In 1Q18, however, the call drops to 32.2 mb/d, around 200 kb/d below current output.

  • Non-OPEC oil supplies rose by 300 kb/d in November, to 58.5 mb/d, largely on higher US output. Following a sharper than expected increase in September, and accelerated well completions, the outlook for US oil production growth has been marginally lifted since last month's Report, to 530 kb/d and 1.1 mb /d for 2017 and 2018, respectively.
  • Higher US oil output underpins around 75% of total non-OPEC supply growth in 2017 and 2018. Supply is forecast to rise by 630 kb/d on average this year and a further 1.6 mb/d in 2018, to reach 59.6 mb/d. Brazil, Canada, UK and Kazakhstan are other sources of growth.
  • Adherence to agreed output cuts from ten non-OPEC producers slipped to 96% in November, from 111% a month earlier and has averaged 83% for 2017 as a whole. Shipping data suggest production problems at Kashagan were partly resolved, boosting output in both November and December.

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

Stocks

Summary

  • OECD commercial stocks fell 40.3 mb in October to 2 940 mb, their lowest level since July 2015. Robust refinery runs and oil product exports to non-OECD countries contributed.
  • OECD crude stocks fell counter-seasonally by 19.7 mb as US and Korean refineries increased runs month-on-month (m-o-m), and despite maintenance work in other countries.
  • Chinese crude stocks likely fell in October for the first time in a year, before rebounding by some 22 mb in November. Overall, builds have slowed down noticeably from 1H17.
  • Preliminary data for November shows a mixed picture, with lower stocks in the US and Singapore, but higher inventories in Europe, Japan and Fujairah. Oil in transit likely fell.

Prices

Summary

  • Benchmark crude prices rose by $4-5/bbl on average in November and traded at their highest level in two years in early December, helped by geopolitical tensions, extended output cuts from OPEC and the closure of a key pipeline in the North Sea.
  • Money managers boosted net long positions in crude futures to a new record, underscoring continued optimism about the oil price but setting up prices for a fall if fundamentals disappoint.
  • Product prices rose in November, but less than crude due to higher refinery production. Naphtha increased more than any other oil product on strong petrochemical demand.

Refining

Summary

  • Our estimate for 3Q17 global refinery intake is now largely finalised at 81.2 mb/d, up by 1.3 mb/d year-on-year (y-o-y). This is the highest rate observed historically, and marks a peak in our current forecast period.
  • The forecast for 4Q17 throughput remains unchanged, seasonally declining 0.4 mb/d to 80.8 mb/d, but up 1 mb/d y-o-y. Most of the decline, however, has already materialised in the October-November maintenance, with December global throughput expected close to August's record rates.
  • In 1Q18, runs are forecast to climb back up again to 81.2 mb/d, up 1.1 mb/d y-o-y, as refiners are expected to build stocks prior to the demand ramp-up in the second quarter.