Oil Market Report: 19 January 2018

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  • Demand estimates in 2017 and 2018 are roughly unchanged at 97.8 mb/d and 99.1 mb/d respectively. A 40 kb/d downward revision to 2016 demand, however, pushed up the 2017 growth to 1.6 mb/d, while our growth estimate for 2018 remains unchanged at 1.3 mb/d.
  • The slowdown in 2018 demand growth is mainly due to the impact of higher oil prices, changing patterns of oil use in China, recent weakness in OECD demand and the switch to natural gas in several non-OECD countries.
  • Global oil supply in December eased by 405 kb/d to 97.7 mb/d due mostly to lower North Sea and Venezuelan output. Production was steady on a year ago as non-OPEC gains of nearly 1 mb/d offset declines in OPEC.
  • A plunge in Venezuelan supply cut OPEC crude output to 32.23 mb/d in December, boosting compliance to 129%. Declines are accelerating in Venezuela, which posted the world's biggest unplanned output fall in 2017.
  • Rapid US growth and gains in Canada and Brazil will drive up non-OPEC supply by 1.7 mb/d in 2018, versus last year's 0.7 mb/d increase. US crude supply will push past 10 mb/d, overtaking Saudi Arabia and rivalling Russia.
  • OECD commercial stocks declined for the fourth consecutive month in November, by 17.9 mb, with a large fall in middle distillates. Preliminary data for December suggest a further fall of 42.7 mb.
  • Global crude oil markets saw an exceptionally tight 4Q17 as the large draw in OECD crude stocks coincided with a decline in Chinese implied crude balances. The combined draw is estimated at 1 mb/d.
  • Benchmark crude prices climbed to a three-year high in early January, reflecting falling stocks, supply issues in the North Sea and Libya, and geopolitical tensions. However, physical markets were softer and oil products failed to match the increases.
  • Global refining throughput hit a record in 4Q17 at 81.5 mb/d, instead of falling seasonally. The US returned to pre-hurricane highs in December and China's refiners ran at their highest ever quarterly level. Margins suffered further from both product stock builds and the rally in crude oil prices.

Is seventy plenty?

The price of Brent crude oil closed earlier this week above $70/bbl for the first time since 2 December 2014 (shortly after OPEC's "market share" ministerial meeting) and money managers have placed record bets on the recent upward momentum continuing. The factors contributing to this burst of optimism by investors include; the possible unravelling of the Iran nuclear deal and recent demonstrations in the country, disruption to the industry in Libya, and the closure of the Forties pipeline system. Although these factors might have faded somewhat, there are others at work. The general perception that the market has been tightening is clearly the overriding factor and, within this overall picture, there is mounting concern about Venezuela's production.

Taking Venezuela first, production has been sliding for a long time - it is now about half the level inherited by President Chavez in 1999 - and in December output was 490 kb/d lower than a year ago, having fallen to 1.61 mb/d. It is reasonable to assume that the decline will continue but we cannot know at what rate. If output and exports sink further other producers with the flexibility to deliver oil similar in quality to Venezuela's shipments to the US and elsewhere, including China, might decide to step in with more barrels of their own.

The oil market is clearly tightening; in the three consecutive quarters 2Q17-4Q17 OECD crude stocks fell by an average of 630 kb/d; such a threesome has happened rarely in modern history: examples include 1999 (prices doubled), 2009 (prices increased by nearly $20/bbl), and 2013 (prices increased by $6/bbl). Since the nadir for Brent crude in June when the price was $45/bbl, the 2017 OECD crude draws have coincided with a price increase for Brent of nearly $25/bbl.

A judgement as to whether the recent price strength is sustainable must take into account the rapid growth in global oil supply seen recently and which will continue through 2018. Short-cycle production from the US is reacting to rising prices and in this Report we have raised our forecast for crude oil growth there in 2018 from 870 kb/d to 1.1 mb/d. It is possible that very soon US crude production could overtake that of Saudi Arabia and also rival Russia's. After adding in barrels from Brazil, Canada and other growth countries, and allowing for falls in Mexico, China and elsewhere, total non-OPEC production will increase by 1.7 mb/d. This represents, after the downturn in 2016 and the steady recovery in 2017, a return to the heady days of 2013-2015 when US-led growth averaged 1.9 mb/d.

This projected big increase in non-OPEC production needs to be set against our current forecast for oil demand. For 2018, we see growth of 1.3 mb/d, a conservative number that acknowledges the current perception of healthy global economic activity, but also takes into account the fact that benchmark crude oil prices have increased by 55% since June and this can dampen oil demand growth to some extent. The uncertainty surrounding Venezuela is such that our regular practice of showing a market scenario chart that assumes steady OPEC production must be treated with caution. If OPEC countries plus their non-OPEC supporters maintain compliance then the market is likely to balance for the year as a whole with the first half in a modest surplus and the second half in a modest deficit.

This scenario, or something similar to it, presumably lies behind the assumption by forecasters surveyed by Reuters that Brent will trade in a $60-$70/bbl range in 2018. Whether or not the recent price rise has run out of steam and seventy really is plenty remains to be seen. However, such are the geopolitical uncertainties and the ever-dynamic prospects for US shale that we should expect a volatile year. 



Estimates of global oil product demand in 2017 and 2018 have been left roughly unchanged at 97.8 mb/d and 99.1 mb/d respectively. A 40 kb/d downward revision to 2016 demand, however, pushed the 2017 growth to 1.6 mb/d vs. 1.5 mb/d in our previous forecast, while 2018 growth remained unchanged at 1.3 mb/d.

The slowdown in 2018 growth is mainly due to the impact of higher oil prices, the changing patterns of oil use in China, recent weakness in OECD demand and the switch to natural gas in several non-OECD countries (see Oil versus Gas Competition). Strong demand growth in OECD Europe and the US in the first half of 2017, largely attributable to lower prices, fell away in the second half of the year. In 2018, oil demand in these countries is unlikely to benefit from falling prices.

Our underlying economic projections are unchanged, but oil price and weather assumptions are significantly changed to reflect recent developments. We use the ICE Brent futures curve as a price assumption and 2018 values increased by $3.15/bbl on average compared to our previous forecast. The impact of higher prices is however partially offset by colder temperatures and revised assumptions regarding the start-up of some petrochemical projects. In the aftermath of Hurricane Harvey, at least two US Gulf Coast petrochemical projects were delayed and their additional ethane feedstocks will be accounted for in 2018 demand.

The recent cold snap in North America is likely to boost heating oil and fuel oil demand in the US, as a spike in natural gas prices supported alternative fuels. Gasoline and kerosene, on the contrary, were penalised by freezing temperatures, but this was not enough to offset the gains in heating fuels. Europe experienced opposite weather conditions with very warm weather at the start of January.

Historical data for some countries have been revised in this Report: additional 2016 data for Indonesia has been received; for South Africa, new data to mid-2017; and data for Pakistan-through October 2017. These revisions roughly offset each other, resulting in a minor downward revision to 2016 and 2017.



The big 2018 supply story is unfolding fast in the Americas. Explosive growth in the US and substantial gains in Canada and Brazil will far outweigh potentially steep declines in Venezuela and Mexico. With oil rallying to $70/bbl, impressive non-OPEC growth of 1.7 mb/d is expected, with the US alone accounting for 1.35 mb/d. The stage was set for a strong expansion last year, when non-OPEC supply, led by the US, returned to growth of 0.7 mb/d and pushed up world production despite OPEC/non-OPEC cuts. US growth of 0.6 mb/d in 2017 beat all expectations, even with a moderate price response to the output deal as the shale industry bounced back - profiting from cost cuts, stepped up drilling activity and efficiency measures enforced during the downturn.

This year promises to be a record-setting one for the US. Crude production of 9.9 mb/d is now at the highest level in nearly 50 years, putting it neck-and-neck with Saudi Arabia, the world's second largest crude producer after Russia. Relentless growth should see the US hit historic highs above 10 mb/d, overtaking Saudi Arabia and rivalling Russia during the course of 2018 - provided OPEC/non-OPEC restraints remain in place.

There is no clear sign yet of OPEC turning up the taps to cool down oil's rally by reclaiming lost market share or to compensate for a precipitous drop in supply from Venezuela, which posted the biggest unplanned decline in 2017. As of December, OPEC had spare capacity of around 3.2 mb/d.

For OPEC, 2017 marked a year of 95% compliance with supply cuts put in place at the start of the year. Total oil production from the group's 14 members fell from an unprecedented 39.6 mb/d to 39.2 mb/d, the first annual decline since 2013. Supply discipline from the non-OPEC camp has been less rigorous, 82% for 2017, but nonetheless strong. The historically high performance rate for the producer pact, however, was met with an equally remarkable increase in US production, which offset roughly 60% of the realised cuts. The impact of the reduction was further blunted by a rebound in output from Libya and Nigeria, excluded from the cuts. Global oil supply in December eased 405 kb/d to 97.7 mb/d due mostly to unplanned outages in the North Sea and lower Venezuelan output. Production was broadly steady on a year ago, as non-OPEC gains of nearly 1 mb/d offset declines in OPEC output.

There was a silver lining for producers taking part in the supply cuts: they earned more in 2017 while pumping less. Among OPEC producers, Saudi Arabia saw the biggest reward, making nearly $100 million a day in additional revenue. Beleaguered Venezuela, on the other hand, only earned an extra $9 million. As a whole, OPEC producers netted an extra $362 million a day. Russia earned the most of all pocketing an additional $117 million a day. Oman made an extra $9 million. Iraq, which produced well above its OPEC target, was a leading beneficiary. Libya saw a big benefit from its production comeback.

The revenue gains may encourage producers to maintain robust compliance. Saudi Arabia and neighbouring Gulf countries have signalled they will continue to restrict supplies to clear the remaining inventory overhang. In December, OPEC supply edged down to 32.23 mb/d, as a sharp decline in Venezuela offset higher flows from elsewhere. The plunge in Venezuelan output raised OPEC compliance in December to 129%, the highest so far. Output from the group was down 1 mb/d on December 2016, when Middle East producers were at record rates.



OECD commercial stocks declined for the fourth straight month in November and, based on preliminary data, fell even more sharply in December, confirming the global oil deficit shown in our balances for 2017. In November, OECD commercial stocks drew by 17.9 mb (600 kb/d) to 2 910 mb. The fall was, just as in October, twice as large as the five-year average draw for the month. Taking into account adjustments in Australia, Belgium and Sweden made at the start of 2017, OECD inventories stood 90 mb above the five-year average, down from 98 mb in October and a peak of 366 mb in July 2016. Stocks covered 61.3 days of forward demand, their lowest level since June 2015. Middle distillates once again led stock falls owing to steady exports from the US to Latin America linked to refinery production issues, and higher demand in the OECD. Middle distillate stocks fell 7.6 mb month-on-month in November with a counter-seasonal fall registered in Europe and a larger-than-usual decrease in Asia Pacific. Higher demand for diesel globally has been the main reason for the decrease in this category since 2017. Middle distillate stocks stood 14 mb below the five-year average, down from an 80 mb surplus at their peak in July 2016.

Crude stocks fell seasonally, by 1.6 mb to 1 141 mb, with gains registered in Europe (+6.4 mb) and Asia Pacific (+1.4 mb) and a large counter-seasonal draw in the Americas of 9.4 mb linked to higher refinery runs. Higher crude imports into Europe and Asia Pacific, however, meant the overall crude draw seen in the OECD during the month was less than that registered over the last five years. OECD NGL and feedstock holdings fell 4.7 mb on the month, in line with seasonal trends, to 331 mb. They remain just 5.9 mb off the historic high reached in August 2017, amid rising North American oil and gas production.

In December, oil stocks in Europe, Japan and the US are likely to have dropped by a combined 42.7 mb (1.4 mb/d), bringing OECD stocks below the 2 900 mb mark for the first time since 2015 and reducing the surplus to the five-year average to 68 mb. There was a sharp 34 mb month-on-month decline in crude stocks owing to higher refinery runs and a 24.7 mb seasonal fall in other products (largely LPG and naphtha), whereas distillate and gasoline stocks rose seasonally. Over 4Q17, OECD stocks fell 104.5 mb (1.1 mb/d), marking an acceleration from the falls seen in 3Q17 (480 kb/d) and 2Q17 (180 kb/d).

Outside the OECD, commercial stocks fell in Singapore (-2.9 mb) and China (-10.5 mb) during November, but rose in Fujairah (+1.5 mb). China's implied crude balance, measured as the difference between commercial stock builds/draws, net imports and crude production minus input into refineries, implied a net stock build of 16.7 mb (560 kb/d). Crude in transit fell 34.4 mb during the month, according to several estimates available at the time of writing, with reduced shipments from the US, the UAE and Nigeria. In December, stocks fell in Fujairah (-1.7 mb) and Singapore (-1 mb). China's crude balance, based on custom estimates, looks to have drawn 7.4 mb, while volumes of oil in transit increased.

OECD oil inventories were revised down by 12.2 mb for October and 8.5 mb for September as new data were received. There was a large downward revision for US crude oil stocks in both months.



Outright crude oil prices climbed to a three-year high in early January, reflecting ongoing geopolitical tensions and steady crude and oil product stock falls globally. Net long positions held by money managers in crude futures broke a new historical record at the end of December. However, builds have been more moderate than in November, suggesting that, unless fresh fundamental factors push prices up over the next few weeks, they could go into reverse. Physical crude markets mostly failed to catch up with higher futures prices during December. North Sea, Urals and West African crude followed Brent futures higher, but elsewhere markets were almost flat. Oil products lagged crude for the second straight month, leading to worsening refining margins globally. Diesel was a notable exception, as below freezing temperatures in North America supported demand and prices.



Instead of seeing the usual seasonal slowdown, global refining throughput in 4Q17 surged to a new record high of 81.5 mb/d, posting the largest year-on-year growth since 3Q15. December throughput, likely to finalise as the highest month yet, was up 2 mb/d from September. Throughput growth came from three major sources: the US, China and India. In the US, refinery intake recovered from 3Q17 outages, returning to above 17 mb/d in December. Throughput dropped elsewhere in the Atlantic Basin in 4Q17, with all net growth in global refinery runs coming from East of Suez. Chinese throughput hit a new record in November, with monthly rates just under 12 mb/d as new refining capacity ramped up. December runs recorded an expected slowdown to 11.5 mb/d. India increased runs to a quarterly record of over 5 mb/d.

Record refining rates did not go unnoticed by the market and crude oil futures rallied in 4Q17 (See Global crude oil and product balances). For the same reason, refining margins continuously softened throughout the quarter, as December indicators hit the lowest in more than a year in Europe and the US, with our implied product balances showing a build in 4Q17.

In 1Q18, refinery intake is forecast to drop some 0.1 mb/d on maintenance works. Still, product markets are seen building stocks at comfortable levels ahead of the peak summer demand season.