Oil Market Report: 15 March 2018

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  • Demand is expected to increase by 1.5 mb/d in 2018 to 99.3 mb/d, a 0.1 mb/d upward revision compared to last month's forecast. Global oil demand is estimated at 97.8 mb/d in 2017, unchanged from last month.
  • Strong early data contributed to an upward revision of 240 kb/d in our outlook for OECD growth in 2018. The switch to natural gas in Pakistan and Iraq's power sectors is responsible for a downward revision of 150 kb/d to non-OECD demand.
  • Global oil supply in February eased to 97.9 mb/d and was up by 0.7 mb/d on a year earlier due to higher non-OPEC output. Strong growth in the US is expected to boost this year's non-OPEC expansion to 1.8 mb/d compared to 760 kb/d in 2017.
  • OPEC crude oil production edged lower in February to 32.1 mb/d, led by losses in Venezuela and the UAE. The call on OPEC crude rises steadily to 32.6 mb/d in 2H18, 480 kb/d higher than current output.
  • OECD commercial stocks rose in January for the first time in seven months to reach 2 871 mb. However, the 18 mb increase was only half the usual level. The surplus to the five-year averaged fell to 53 mb. Cushing crude stocks reached their lowest level in three years.
  • Global crude oil prices fell in the first half of February, before stabilising later in the month. The ICE Brent futures curve remains in backwardation. However, spreads are narrowing. Brent prices have averaged close to $67/bbl this year.
  • Global refining throughput in 1Q18 slowed from 4Q17's record levels by 0.9 mb/d. It will ramp up to a new record in 2Q18 at 81.8 mb/d. We assume refining throughput will only partially meet the seasonal demand increase, with inventories filling the gap.

On balance

The past month has been relatively uneventful in terms of data changes, apart from an increase to our demand growth estimate. Crude oil prices are slightly lower than last month, and have generally been relatively stable for several weeks. Even so, the value of Brent crude oil is still averaging close to $67/bbl in 2018, which is about 20% higher than in the early part of last year.

Looking at demand, our estimate for global growth in 2018 has increased by 90 kb/d taking it up to 1.5 mb/d. Although this is a modest revision, it is interesting that provisional data suggests very strong starts to the year in China and India, which, taken together, accounted for nearly 50% of global demand growth in 2017. Cold weather in some parts of the northern hemisphere in January-February saw an increase in heating demand.

On supply, new and revised data shows very little change in the outlook versus last month. Although US production was lower than expected in December, there is no change to our overall 2017 number neither to our outlook for 2018 that expects crude output there to grow by 1.3 mb/d. We retain our view that total non-OPEC production grew by 760 kb/d last year and that it will surge by 1.78 mb/d this year. Within the OPEC countries, the biggest risk factor is, and will likely remain, Venezuela. Our estimate for February shows output down again, by 60 kb/d. Other countries with a risk factor include Libya, and, to a lesser extent, Nigeria. In Libya, we saw another modest supply gain in February to 1.02 mb/d and, although stability cannot be taken for granted, it appears that the frequency and severity of production interruptions is declining and higher rates of output are being maintained. Taking OPEC as a whole, quota compliance in February was 147%, but even if Venezuela's production were at its allocated level, the group's compliance would still be close to 100%.

Stocks, and specifically OECD stocks, remain the most-cited indicator of oil market re-balancing. In this Report, we note that in January they increased month-on-month for the first time since July. However, the increase of 18 mb was half the average level for January seen in the past five years. Indeed, the surplus of total OECD stocks against the five-year average fell for the ninth successive month to 50 mb, with products showing a very small deficit.

In the meantime, market re-balancing is clearly moving ahead with key indicators - supply and demand becoming more closely aligned, OECD stocks falling close to average levels, the forward price curve in backwardation at prices that increasingly appear to be sustainable - pointing in that direction. In our chart, we assume for scenario purposes that OPEC production remains flat for the rest of 2018, and on this basis there will be a very small stock build in 1Q18 with deficits in the rest of the year. With supply from Venezuela clearly vulnerable to an accelerated decline, without any compensatory change from other producers it is possible that the Latin American country could be the final element that tips the market decisively into deficit.

Moving further into the future than is usual in this Report, in the IEA's five-year outlook, published in Oil 2018 - Analysis and Forecasts to 2023, we highlighted how in 2017 discoveries of new resources fell to a record low of only 4 bn barrels while 36 bn barrels were actually produced. We also pointed out that in 2018 investment spending is likely to grow only by 6% having barely increased at all in 2017. To 2020, production increases from non-OPEC countries are by themselves enough to meet demand growth. After that time, the pace of growth from these countries is less certain, and the market might well need the supplies currently being held off the market by leading producers.



We now have our first set of complete 2017 data for OECD countries and the major non-OECD countries. Global oil product demand in 2017 is estimated at 97.8 mb/d, unchanged from last month. Global oil demand is expected to rise by 1.5 mb/d to 99.3 mb/d in 2018, a 90 kb/d increase compared to last month's Report.

OECD oil demand has been revised up by 240 kb/d in 2018, reflecting the impact of recent strong data and lower prices. For Europe in particular, recent data show strong demand growth in Poland and Turkey. US demand has also been revised higher, reflecting the impact of low temperatures in January and February on gasoil demand and as lower prices are expected to boost gasoline consumption. Japan's 2018 oil demand is likely to be stronger than expected in our previous forecast.

By contrast, non-OECD demand has been revised down by 150 kb/d for 2018. In Asia, small upward revisions in China and India almost offset downward revisions to Pakistan, where fuel oil deliveries fell sharply on new LNG imports. Russia's historical and forecast demand has been lowered due to changes to estimates of demand for 'other products'. Revisions in the Middle East reflect the rapid displacement of crude oil for direct use in power generation by imported and domestic natural gas in Iraq, demand changes in Saudi Arabia following the recent retail price increases, and downward revisions to demand in Qatar due to the embargo.



Global oil supply eased a touch in February, but at 97.9 mb/d was up 740 kb/d on a year ago thanks to a stronger performance from the US. Further expansion in non-OPEC countries is expected over the remainder of 2018, lifting total gains for the year to 1.8 mb/d, more than double the rate of last year when the US returned to growth. While the US is expected to account for the majority of the increase, expanding by 1.5 mb/d, gains will also come from Canada, Brazil and Kazakhstan. This will offset declines elsewhere including in Mexico and China.

For February, non-OPEC supply was 58.9 mb/d and stood 810 kb/d higher than a year ago. As for OPEC, a little over a year into the output deal, its oil production is down only slightly on 2017. A steep slide in Venezuelan output has been mostly offset by rebounds in Libya and Nigeria.

Compared with the previous month, OPEC crude oil production edged lower to 32.1 mb/d, led by losses in Venezuela and the UAE. Further declines in Venezuela raised OPEC's compliance rate in February to 147%, the highest so far, and lifted the average since the start of the deal to 102%. Compliance by the non-OPEC countries was less impressive at 86%, but still robust. As for the market balances, quickening demand growth implies the requirement for OPEC crude oil will rise and reach 32.6 mb/d in 2H18 - 480 kb/d more than the 14-member group is pumping currently. That suggests further stock draws lie ahead assuming current levels of production are maintained.

Officials from Saudi Arabia and Russia, drivers of the deal, have stressed their willingness to keep the pact in place and insist that any exit will be orderly. They have also signalled their willingness to institutionalise the partnership, although there is little detail available as to what this entails.

While attention has focused on the production side of the cutbacks, exports tell an equally important story. Top producers such as Saudi Arabia, Russia, Iraq and Iran ramped up their production and exports during 4Q16, in the run-up to the curbs. Since the output cuts began, however, there has been a pronounced shift in geographic trade flows along with a sharp drop in overall shipments.

It is hardly surprising that Asia, a key market for many exporters, has seen deliveries increase. Most producers placed higher volumes into China last year to meet increased demand from independent refiners. Iraq, which has achieved a compliance rate of only 41%, boosted deliveries to India to such an extent that it overtook Saudi Arabia as the biggest source of crude.

The US, still holding ample stocks and seeing impressive growth in domestic production, seems an obvious choice for Saudi cutbacks. Indeed, over the past year, shipments nearly halved. Venezuela, with its industry in decline, has been forced to cut exports to the US, and in February they sank to around 400 kb/d versus 670 kb/d in 4Q16. Lower Venezuelan shipments have, however, been partly offset by higher Canadian flows. Still barred from selling oil into the US, Iran maintained higher sales to Europe.

Libya is ramping up short-haul sales into Europe where it is closing in on Saudi Arabia as the third biggest source of seaborne supply after Iraq and Russia. As for Russia, while cutting production by nearly 300 kb/d since October 2016, exports, including seaborne shipments to Europe, held steady during 2017. The OPEC/non-OPEC cuts have perhaps made it easier for the US to enter international markets. It, too, is shipping as much as it can to China and boosting supplies into Europe. US crude shipments, currently running at around 1.5 mb/d, are set to climb.



OECD commercial stocks rose in January for the first time in seven months by 18 mb (580 kb/d) to reach 2 871 mb. While this monthly increase bucks the recent downward trend, it is normal for OECD stocks to increase at the start of the year amid lower seasonal demand for motor fuels. The 18 mb build was less than the five-year average increase of 34.9 mb for the month. OECD inventories stood 53 mb above the five-year average at the end of January, down from an upwardly revised 70 mb in December. In January, crude stocks gained in line with seasonal trends by 16.6 mb to 1 114 mb, with a larger-than-usual increase in Europe driven by higher imports and reduced refinery runs. It is also likely the early return of the Forties pipeline in the North Sea following an outage boosted total holdings. Crude stocks in the OECD Americas rose by much less than usual at this time of year, mainly due to high refinery runs and steady crude exports from the US.

Oil product stocks, meanwhile, fell in January counter-seasonally by 5.1 mb to 1 439 mb, driven by large falls in 'other' product stocks (largely US LPG) linked to higher demand and below freezing temperatures in North America. Inventories of gasoline (+10.1 mb) built seasonally, but steady exports to Latin America and West Africa related to refinery issues and fuel shortages meant the increase was less than usual. Middle distillates (+11.7 mb) and fuel oil (+4.4 mb) stocks increased in line with seasonal patterns.

In February, preliminary figures for the OECD point to renewed stock falls of around 24.8 mb, with very steep draws recorded in Japan (-18 mb) due to very cold temperatures and high kerosene consumption and also some falls in the US (-5.6 mb) and Europe (-1.1 mb). On a product category basis, crude stocks drew marginally and there were significant falls in middle distillate holdings (-9.5 mb) and other products (-15.6 mb). During the month, stocks also drew in Fujairah (-0.6 mb) and Singapore (-0.1 mb).

OECD oil inventories were revised down 3.1 mb in November and up 2 mb in December. We have also incorporated historical figures for Swedish oil stocks for the year 2016 following a change in the country's data collection methodology made at the beginning of 2017. This means Sweden's 2016 oil stocks are now around 15-17 mb higher than published last month. Stock figures prior to 2016 are still based on the previous methodology. Minor changes to Swedish stocks for the January-August 2017 period of 0-1 mb on average each month have also been incorporated.



Outright crude oil prices fell in the first two weeks of February as the market experienced a sell-off triggered by equity market upheaval and an increasingly positive outlook for US LTO supply growth. The slide halted on 12 February as front-month ICE Brent futures reached $62.59/bbl, with NYMEX WTI futures having fallen below $60/bbl on 9 February. The continued high rate of compliance with the OPEC/non-OPEC production agreement provided support to markets. The ICE Brent futures curve continued to display backwardation, however the narrowing spread suggested less market tightness. Global benchmarks for physical crude prices fell but the US strengthened relative to North Sea Dated as stocks continued to fall at Cushing, Oklahoma. Cushing inventories are currently at their lowest level in three years. The rapid evolution of US midstream infrastructure is having a significant impact on the relative prices of US grades as flows increasingly bypass Cushing and head directly to the US Gulf Coast. Oil product prices also fell in February, with weak demand weighing on motor fuels in particular.



New and revised data confirm our forecast of record throughput in 4Q17. At 81.7 mb/d, runs were up by a massive 1.9 mb/d year-on-year (y-o-y). This allowed refiners to partially rebuild product stocks after two consecutive quarters of large drawdowns. However, our 1Q18 throughput estimate has been revised down by 0.4 mb/d due to unplanned outages in the US, lower than expected throughput in China and a more extensive maintenance programme in the Middle East. Runs decline by 0.9 mb/d from 4Q17. This could lead to a counter-seasonal draw in product inventories.

Almost all of the seasonal slowdown in 1Q18 comes from OECD refiners, with the US accounting for the largest share. Nevertheless, US refiners continue to operate at seasonal record levels, in order to supply Mexican and Latin American markets. Non-OECD refiners will take centre stage again, providing most of the annual gains in the first half of 2018. Indian throughput reached a record level in January, while Chinese refiners processed 360 kb/d more y-o-y in January-February. There is also momentum in the Middle East, where maintenance in 1Q18 is potentially merely a pause between two record quarters.

Not just for the Middle East, but for global refining throughput as a whole we are forecasting another record level in 2Q18, at 81.8 mb/d, up 1 mb/d quarter-on-quarter (q-o-q), with our rationale explained in Global crude oil and products balances.