Oil Market Report: 13 April 2018

Download full reportDownload tables


  • Our forecast for global oil demand growth for 2018 is unchanged from last month's report at 1.5 mb/d. OECD demand in 1Q18 was revised up by 315 kb/d, partly due to cold weather in the US and the start-up of a petrochemical project. There are offsetting reductions to growth in 2Q and 3Q.
  • Non-OECD demand in 1Q18, by contrast, has been revised down by 260 kb/d due to weak Chinese data. India's early 2018 growth is strong at 380 kb/d y-o-y in the first two months.
  • Global oil supply eased by 120 kb/d in March, to 97.8 mb/d, after OPEC and non-OPEC producers deepened their cuts to 2.4 mb/d. Output was nevertheless 1.4 mb/d higher than a year ago mainly due to higher US production. Non-OPEC supply is set to grow by 1.8 mb/d in 2018.
  • OPEC crude production fell by 200 kb/d in March, to 31.83 mb/d, on further declines in Venezuela and lower output in Africa. Compliance with the output deal reached 163%. The call on OPEC crude and stocks will hover around 32.5 mb/d for the rest of this year.
  • OECD commercial stocks declined by 26 mb to 2 841 mb and were just 30 mb above the five-year average at end February. The average could be reached by May, on the assumption of tight balances in 2Q18. Product stocks are already in deficit.
  • ICE Brent futures averaged $66.72/bbl in March and in recent days have risen above $70/bbl to levels not seen since December 2014. Tension in the Middle East is a key factor alongside tighter compliance with the OPEC/non OPEC output deal.
  • After 1Q18's peak refinery maintenance in Europe and the US, global throughput will see a seasonal ramp-up in 2Q18. From March to July, runs will increase by 3.1 mb/d, but supply of refined products will lag behind demand growth.

Mission accomplished?

Political uncertainty in the Middle East has returned to the fore in recent days. As we write, uncertainty about the next steps in Syria and Yemen have helped propel the price of Brent crude oil back above $70/bbl. It remains to be seen if recently elevated prices are sustained and if so what are the implications for the market demand and supply dynamics.

In the meantime, our overall view of global demand and supply growth in 2018 is unchanged from last month. For demand, early in 2018 stronger growth in the US was partially offset by weaker growth in China. India has seen a strong start to the year. Globally, we expect oil demand to grow by 1.5 mb/d in 2018. However, there is an element of risk to this outlook from the current tension on trade tariffs between China and the US, and we look at this issue in the demand section of this Report.

For supply, our outlook for non-OPEC growth remains unchanged at 1.8 mb/d. Data for US production show that in January output fell by a modest 24 kb/d, much in line with our forecast with adverse weather playing a part. We retain our view that US crude production in 2018 will increase by 1.3 mb/d versus last year. However, there is concern about bottlenecks in takeaway capacity that have seen recent discounts for WTI Midland versus Houston widen to a record at nearly $9/bbl. This issue applies in Canada as well as in the US.

As far as the OPEC/non-OPEC output cuts are concerned, some countries party to the 2016 Vienna agreement, have, for different reasons, seen production fall by more than they promised. These extra cutbacks total over 800 kb/d. To all intents and purposes, more than a second Saudi Arabia has been added to the output agreement. The overall state of the cuts in March shows OPEC's compliance rate at 163% with its non-OPEC partners achieving a rate of 90%. With just under half of global oil supply subject to restraint and oil demand growing steadily, the impact on stocks has been substantial. The text of the Vienna agreement notes that OECD and non-OECD stocks were above the five-year average and states that they should fall to "normal" levels. Normal is assumed to mean, although it does not explicitly say so, the five-year average. There is less clarity with regard to non-OECD stocks, so five-year average OECD stocks have become the de facto target to measure success of the output cuts.

Since May last year they have fallen constantly the average and new data for February show a larger than usual fall in volume terms with stocks now only 30 mb above the five-year level, and product stocks actually below it. Our balances show that if OPEC production were constant this year, and if our outlooks for non-OPEC production and oil demand remain unchanged, in 2Q18-4Q18 global stocks could draw by about 0.6 mb/d. With markets expected to tighten, it is possible that when we publish OECD stocks data in the next month or two they will have reached or even fallen below the five-year average target. It is not for us to declare on behalf of the Vienna agreement countries that it is "mission accomplished", but if our outlook is accurate, it certainly looks very much like it.



Our outlook for global oil demand growth is unchanged from last month's Report. Some unusual data were, however, reported in 1Q18 for major consumers, but they largely cancelled each other out. An upward revision to US demand was almost offset by a downward revision for China. Smaller revisions due to new data, weather and price developments have been incorporated. For 2018 as a whole, oil demand is still expected to grow by 1.5 mb/d to 99.3 mb/d.

OECD oil demand was untouched for 2018 compared to last month's Report, as stronger growth in 1Q18 is offset by lower growth for the rest of the year. OECD demand in 1Q18 has been revised up by 315 kb/d, led by the US due to cold weather and the start-up of a petrochemical project. Lower growth subsequently is largely attributable to a higher oil price assumption.

Non-OECD demand for 2018 as a whole is also roughly similar to last month, but in 1Q18 it has been revised down by 260 kb/d due to weak Chinese data. We expect a rebound in Chinese demand from March onwards and we have revised slightly upwards our forecast for the rest of the year. India's oil demand continues to be strong.

One new factor to take into consideration is the potential risk from the trade dispute between the US and China. While it is too early to adapt our forecast to take account of possible protectionist measures, we discuss some possible implications in the next section.



World oil supply eased to 97.8 mb/d during March, after OPEC/non-OPEC producers cut output by 2.4 mb/d, significantly more than their pledged 1.7 mb/d. Just over a third of the March cut, however, was due to unintentional reductions from Venezuela and Mexico, which have lost a combined 890 kb/d versus the October 2016 baseline. Chronic mismanagement has pushed down Venezuelan crude production by 580 kb/d compared to a year ago, while Mexican output stands 240 kb/d lower. Losses from Venezuela helped push OPEC crude output to the lowest level in nearly three years and raised compliance to an eye-popping 163%. Non-OPEC countries participating in the output deal saw a strong compliance rate of 90%.

The US is meanwhile powering ahead. Its relentless growth kept global oil supply during March running 1.34 mb/d above a year ago and allowed it to overtake Saudi Arabia to become the world's second biggest producer of crude oil after Russia. Further expansion is on the way, although infrastructure constraints are emerging that could slow the pace somewhat. In any case, with anticipated gains of 1.5 mb/d, the US is dominating non-OPEC supply growth of 1.8 mb/d in 2018. Canada, Brazil and Kazakhstan are also expected to post growth, which will compensate for lower production from China and Mexico. For March, non-OPEC supply was 59.06 mb/d, which was 1.36 mb/d higher than a year ago. OPEC total oil output was largely unchanged year-on-year (y-o-y).

Despite the strong US performance, our balances suggest that the call on OPEC crude and stocks will hover around 32.5 mb/d for the rest of this year - nearly 700 kb/d more than the 14-member group produced in March. Assuming current OPEC production is maintained, further stock draws lie ahead. As of March, OPEC's spare production capacity was 3.41 mb/d, with Saudi Arabia accounting for 64% of the total.

So far, there is no evidence of OPEC raising production in response to recent higher prices or to make up for the plunge in Venezuelan supply. OPEC crude oil production in March fell by 200 kb/d to 31.83 mb/d, due mainly to losses in Venezuela and African member countries. Gulf producers continue to pump below their agreed level. Overall OPEC compliance with supply cuts is distorted by Venezuela's crisis, but even if Caracas produced at its agreed level, the performance rate would still be above 100%.

Officials from Saudi Arabia and Russia have meanwhile signalled their willingness to keep the output pact in place and stress that any exit will be orderly. There is also increasing talk of institutionalising the partnership, although there is little detail available as to what this entails. Saudi Crown Prince Mohammed bin Salman has said he foresees a two-decade alliance, while Russian Energy Minister Alexander Novak has said Russia is willing to cooperate indefinitely with OPEC.

For now, though, it is clear that countries participating in the deal continue to earn more while producing less. Saudi Arabia and Russia saw the biggest reward in 1Q18, earning $121 million a day in additional revenue compared to 2017. Venezuela, on the other hand, lost $2 million a day. As a whole, OPEC producers netted an extra $372 million a day. Oman made an extra $9 million. Iraq, which has been producing above its OPEC target, was a leading beneficiary. Libya, too, continued to benefit from its production recovery.



OECD commercial stocks declined by 25.6 mb month-on-month (m-o-m) in February to 2 841 mb, the lowest level since April 2015. While a decrease is expected at this time of year when heating demand is at its highest in the northern hemisphere and refineries begin to cut runs for maintenance work, the fall was three times greater than usual. OECD inventories have fallen for six of the last seven months and have declined sharply versus the five-year average, used by OPEC as a metric to measure the success of its output cuts. At end-February, OECD stocks were just 30 mb above the five-year average, with oil products in deficit. The surplus has decreased steadily in the OECD Americas helped by strong refinery utilisation and at the end of February it was just 24 mb above the average.

The five-year average basis of OECD inventories is set to increase by 8 mb in March, 17 mb in April and 27 mb in May, meaning that stocks only have to remain unchanged between February-May for the remaining surplus to be eroded. Taking into account preliminary stock figures for March and the expected stock draws we see globally during 2Q18 (assuming stable OPEC output), we estimate it likely that OECD stocks will reach the average by April or May. When stocks are expressed in days of forward demand, OECD inventories have been below the five-year average since January 2018 as a result of the stock reduction and the increase in OECD demand seen in the last few years. If the metric were the comparison to the ten-year average, the surplus would mathematically increase by 78 mb to 108 mb in February and would likely take several more months to draw down.

In February, OECD crude stocks increased by 1.7 mb with gains registered in Europe (+4.9 mb) and the Americas (+3.2 mb).  However, the increase was far less than implied by seasonal patterns due to high refinery utilisation in North America and lower crude imports in Japan. Oil product stocks, meanwhile, drew in line with seasonal expectations by 26 mb to 1 430 mb. Cold weather in North America continued to push middle distillates and other product stocks (largely US LPG) lower, whereas gasoline inventories increased unexpectedly thanks to higher refinery runs and lower demand.

Preliminary data for March is mixed. US oil stocks declined by a further 17 mb m-o-m with a sharp fall in diesel and gasoline inventories. By contrast, Japan's stocks increased by 7.5 mb with higher crude and middle distillate holdings and Europe's stocks gained 8.3 mb, also because of crude.

OECD oil inventories were revised up by 0.4 mb in December and down by 3.9 mb in January. The largest revisions were made in the Americas and Europe for January and largely offset each other. There is a break in stocks between December 2017 and January 2018 for refinery feedstocks in Switzerland, as more detailed information on refinery activity is now collected by the national administration, however the impact on overall OECD stock levels is negligible.



Outright crude prices rose modestly in March as compliance with the OPEC output agreement remained strong and heightened geopolitical tensions, particularly related to possible sanctions on Iran, increased the possibility of supply disruptions. However, gains were limited in the face of moderate demand from refiners due to seasonal maintenance in the northern hemisphere. Production in West Texas continues to grow but prices of LTO came under pressure from export constraints as pipeline flows neared capacity. Global product price movements were mixed. In the US, gasoline prices moved up with the change to summer specification fuel, and globally naphtha gained strength thanks to petrochemical demand and lower refinery output.



After two years of relatively low-key growth, capacity additions are back with a vengeance. Newcomers are looking to shake-up the status quo in an attempt to grab market share. By end-2018, we expect to see 1.6 mb/d of net new capacity, higher than 2018 total demand growth of 1.5 mb/d and well above the estimated growth in demand for refined products. East of Suez accounts for more than half of the new capacity, and the Atlantic Basin also sees some growth. Perfect storm brewing for refiners? explains why this could weigh heavily on refining margins this year.

Our throughput estimate for 1Q18 is revised up by 200 kb/d, but the forecast for 2Q18 has been reduced by 560 kb/d due to a higher maintenance information, further deterioration in Venezuela and the expectation of tighter crude oil markets this summer. Crude oil throughput swings up 3.1 mb/d from March to July, while the seasonal crude burn (e.g. in the Middle East) starts ramping up, too. As discussed in Supply, OPEC March output was at the lowest level in nearly three years, and if the group’s crude production stays flat from these levels, crude oil in 2Q18 will again see draws after a build in 1Q18

While our monthly throughput forecast by country goes only to July 2018, we have also provisionally modelled global quarterly forecasts of refinery intake for the rest of the year, based on refined product demand and crude oil supply. If refineries were to run at the levels required for a balanced refined product markets, crude oil stocks would need to draw by 1.1 mb/d in 3Q18, which would be the fastest rate since 3Q13’s 1.3 mb/d draw.

However, a more likely scenario is continued draws in refined products in 3Q18, with runs below the required levels, alongside a significant draw in crude oil. At this rate, both the refined product overhang and the global crude oil overhang (excluding Chinese implied crude oil stock builds), measured in terms of cumulative balances starting from 1Q14, will turn negative in 3Q18. If crude oil tightness results in significantly higher prices, this may affect refining margins to the extent that the seasonal throughput increase will be constrained, and product inventories will draw to an even greater extent.