Oil Market Report: 16 May 2018

Download full reportDownload tables


  • Global oil demand growth for 2018 has been revised slightly downwards from 1.5 mb/d to 1.4 mb/d. While recent data confirms strong growth in 1Q18 and the start of 2Q18, we expect a slowdown in 2H18 largely attributable to higher oil prices. World oil demand is expected to average 99.2 mb/d in 2018.
  • Global oil supplies held steady in April at close to 98 mb/d. Robust non-OPEC output offset lower OPEC production. Strong non-OPEC growth, led by the US, pushed global supplies up 1.78 mb/d on a year ago. Non-OPEC output will grow by 1.87 mb/d in 2018, a slightly higher rate than seen in last month's Report.
  • OPEC crude production eased by 130 kb/d in April, to 31.65 mb/d, on further declines in Venezuela and lower output in Africa. Compliance with the Vienna Agreement reached a record 172%. The call on OPEC crude and stocks will average around 32.25 mb/d for the remainder of 2018, nearly 0.6 mb/d higher than April output.
  • OECD commercial stocks declined counter-seasonally by 26.8 mb in March to 2 819 mb, their lowest level since March 2015 and 214 mb below year-ago levels. In the process, they fell 1 mb below the five-year average.
  • ICE Brent and NYMEX WTI futures prices rose to multi-year highs in recent days, and both are up by more than $10/bbl since the start of the year. Solid oil demand, reduced OPEC output and geopolitical developments continue to underpin price gains.
  • Global refining throughput is on the rise with runs expected to hit a record 83 mb/d in July-August. Throughput growth, however, is not sufficient to cover all refined products demand, with stock draws expected to persist through 2Q18 and 3Q18.

From fundamentals to geopolitics

The decision by the United States to withdraw from the Joint Comprehensive Plan of Action regulating Iran's nuclear activities has switched the focus of oil market analysis from the fundamentals to geopolitics. In these early days, there is understandable uncertainty about its potential impact on Iran's oil exports, which are currently about 2.4 mb/d. There is a 180-day period for customers to adjust their purchasing strategies and it remains to be seen how waivers and other aspects of the sanctions will be implemented. In addition, other signatories to the JCPOA have said that they will continue with the agreement.

When sanctions were imposed in 2012, Iran's exports fell by about 1.2 mb/d. It is too soon to say what will happen this time, but we should examine whether other producers could step in to ensure an orderly flow of oil to the market and offset a disruption to Iranian exports. Neither Venezuela nor Mexico can raise output in the short term, but some of the 1.5 mb/d that have been cut by other producers under the Vienna Agreement might be available to keep markets well supplied. A statement by Saudi Arabia shortly after the US announcement acknowledged the need to work with producers and consumers to mitigate possible supply shortfalls. This is especially welcome since the possibility of lower Iranian exports is not the only supply risk hanging over the market today.

In Venezuela, the pace of decline of oil production is accelerating and by the end of this year output could have fallen by several hundred thousand barrels a day. Our April data show that Venezuela's production is 550 kb/d lower than its target under the Vienna Agreement and this "excess" is more than Saudi Arabia's total commitment. The potential double supply shortfall represented by Iran and Venezuela could present a major challenge for producers to fend off sharp price rises and fill the gap, not just in terms of the number of barrels but also in terms of oil quality.

The decision by the US Administration had, to some extent, already been factored into oil prices. Even so, alongside steady demand growth, solid compliance with the Vienna Agreement, and new data showing a further fall in stocks, it contributed to Brent prices rising above $77/bbl. As key players consider how to react to the new policy, this Report shows that the market balance continues to tighten, though by slightly less than seen last month. Because of rising prices, we lowered our estimate for 2018 global oil demand growth by 40 kb/d to 1.4 mb/d, and we increased our expectation for US oil production growth this year by 120 kb/d.

As the International Monetary Fund noted recently, the global economy is doing well. Therefore, we remain confident that underlying demand growth remains strong around the world, which has been an important factor in the rise in oil prices. Still, the fact is that crude oil prices have risen by nearly 75% since June 2017. It would be extraordinary if such a large jump did not affect demand growth, especially as end-user subsidies have been reduced or cut in several emerging economies in recent years.

On the supply side, in today's uncertain geopolitical climate, higher production from the US will be an important contribution to compensating for lower volumes from elsewhere. For now, this Report shows a modest increase in our estimate for US output growth in 2018, mindful of the current logistics constraints that have manifested themselves in the extraordinary widening of the differential between WTI prices at Midland and the Gulf Coast to $15/bbl. We note that several projects are in development to ease regional bottlenecks and to help rising US production reach markets.

For some time, the focus has been on OECD stocks, and new data show a further decline in March of 27 mb to the lowest level in three years and to 1 mb below the widely cited five-year average figure. For now, the rapidly changing geopolitical landscape will move the attention away from stocks as producers and consumers consider how to limit volatility in the oil market. For its part, the IEA will monitor developments closely and is ready to act if necessary to ensure that markets remain well supplied.



Global oil demand growth for 2018 has been revised slightly downwards in this Report from 1.5 mb/d to 1.4 mb/d. While recent data continue to point to very strong demand in 1Q18 and the start of 2Q18, we expect a slowdown in growth in 2H18. Demand at the start of the year was supported by cold weather in Europe and the US, the start-up of new petrochemical capacity in the US and a solid economic background. For the first half of the year, demand in both OECD and non-OECD countries has been revised upwards slightly. While the economic environment will continue to support oil demand - we have updated our economic forecast in line with the latest IMF outlook - support from harsh weather conditions will vanish and the recent jump in oil prices will take its toll. Therefore, world oil demand growth is expected to slow from 1.52 mb/d in 1H18 to 1.35 mb/d in 2H18.

OECD oil demand has been revised down by 60 kb/d for 2018 compared to last month Report, as an upward revision of 40 kb/d to 1H18 demand (mainly in 2Q18 in Australia and the US) is more than offset by a downward revision of 150 kb/d in 2H18. The lower growth for 2H18 is largely attributable to a higher oil price assumption.

Non-OECD demand in 2018 is also revised down by 60 kb/d compared with our last report due to higher prices. An upward revision of 50 kb/d in the first half of the year (evenly distributed across regions) is more than offset by a 160 kb/d downward revision in 2H18.



Venezuela's production collapse has tightened the global oil market more quickly than many anticipated even with robust non-OPEC supply growth and now there is additional uncertainty following the withdrawal of the US from the Iran nuclear deal. Iran, the world's fifth largest oil exporter, is currently producing 3.82 mb/d of crude and shipping 2.4 mb/d to world markets. Including condensates and NGLs, Iranian output is nearly 4.8 mb/d, or close to 5% of global oil supply.

The freefall in Venezuela has already pushed compliance with the Vienna Agreement off the charts and, together with losses in Mexico, accounts for almost 40% of the 2.5 mb/d that was removed from the market in April. That is before the re-imposition of sanctions by the US on Iran. Exports of Iranian crude were cut by more than 1 mb/d when international sanctions were in force from 2012-15, but only time will tell the extent of the disruption this time round (see Iran supply uncertainty increases as US revives sanctions).

During April, world oil supply held steady near 98 mb/d, but was up 1.78 mb/d on a year ago thanks to booming non-OPEC supply. Record output from the US pushed non-OPEC supplies up 2.1 mb/d above year ago levels, with supply edging up month-on-month (m-o-m) to stand at 59.4 mb/d. Heavy maintenance in Canada was more than offset by continued growth in the US and seasonally rising global biofuels production.

The plunge in Venezuelan supply dragged OPEC oil output down 340 kb/d on the previous year. Venezuela's crude oil output has sunk to 1.42 mb/d, the lowest level since the early 1950s, and continued declines could cut capacity by several hundred thousand barrels a day by the end of this year - just as the market feels the full impact of US sanctions on Iran.

It is then, too, that the call on OPEC crude climbs back to 32.3 mb/d, 610 kb/d more than the group is currently pumping. From now through the end of the year, the call on OPEC stands an average 580 kb/d above April output, implying steep stock draws should OPEC crude output remain at current levels.

So far, Saudi Arabia and core Gulf producers have not ramped up output to compensate for Venezuela's losses. OPEC crude oil production in April fell by 130 kb/d to 31.65 mb/d, due mostly to further losses in Venezuela and African member countries. Gulf producers continue to pump below or near their agreed supply targets. However, immediately following the US decision to quit the nuclear agreement with Iran, Saudi Arabia vowed to work with major OPEC and non-OPEC producers as well as major consumers to "mitigate the impact" of any potential shortages.

So far, the US and Canada, which together added 1.8 mb/d to world supplies in 1Q18 compared with a year ago, are helping to offset the unintended declines in Venezuela and Mexico. While production will continue to ramp up, this may not be enough to compensate for potentially steeper losses. Elsewhere in non-OPEC, growth from Brazil and Kazakhstan is offset by lower production from Mexico, China and other Asian producers.

As for the US, already impressive growth of 1.6 mb/d in 2018 is bumping up against emerging infrastructure constraints that could cap gains. Furthermore, independent producers are showing little enthusiasm to drill more wells despite higher prices and are instead prioritising capital discipline and shareholder returns. Overall non-OPEC supply this year is expected to expand by a hefty 1.87 mb/d.

Parties to the Vienna Agreement, scheduled to meet on 22 June, have signalled they intend to keep supply cuts in place until the end of 2018. Should a decision be taken to remove the cuts, only Saudi Arabia, the UAE, Kuwait and Russia are likely to be capable of a quick ramp up of substantial volumes. The four producers pumped at record rates ahead of the supply cuts and could, in theory, increase output by a combined 1.3 mb/d in short order. As of April, OPEC's spare production capacity was 3.47 mb/d - defined as the level that can be reached within 90 days and sustained for an extended period - with Saudi Arabia accounting for roughly 60% of the total.



OECD commercial stocks declined by 26.8 mb month-on-month (m-o-m) in March to 2 819 mb, their lowest level since March 2015. The drop was strongly counter-seasonal as OECD stocks typically increase slightly at this time of year. It means that, for the first time since 2014, OECD stocks were below the five-year average metric widely cited to measure the success of the OPEC/non-OPEC Vienna Agreement, by 1 mb. Since the accord was implemented, OECD stocks have declined by 233 mb.

In March, OECD crude stocks fell by 7.1 mb. There were increases in Europe (+7.5 mb) and the Americas (+1.1 mb) but a sharp fall in Asia Oceania (-15.7 mb) to an all-time recorded low owing to reduced imports. The increase seen in the Americas was less than the average for this time of year, as refiners continued to process crude at near-record rates and with high US crude exports. The increase in US crude production seen in the last year has so far failed to translate into higher crude stockpiles.

During March, OECD oil product inventories also declined, by 24.5 mb in line with seasonal patterns, due to higher demand in the northern hemisphere for motor fuels such as diesel and gasoline. Middle distillate stocks fell 13.8 mb m-o-m to 536 mb and were close to their lowest level in three years. There are only a few months left to rebuild distillate stocks ahead of the northern hemisphere summer, when demand for diesel and aviation fuels tends to increase. Gasoline stocks, meanwhile, fell 13.6 mb m-o-m in March but remain above the five-year average.

Overall, for 1Q18, combined OECD commercial and government stocks fell 27.7 mb (310 kb/d). There were decreases for commercial stocks in the Americas (-38.4 mb) and Asia Oceania (-29.4 mb), but an increase in Europe (+33.3 mb) driven by higher crude and fuel oil inventories. Europe's recent stock build can be explained by a slowdown in refining activity as well as reduced fuel oil exports to Asia. OECD strategic reserves, on the other hand, increased 6.8 mb with small gains in France and the US.

In addition, oil stocks held by Chinese majors increased by a sharp 31.1 mb (nearly 350 kb/d) during the quarter, while record crude imports imply a further build in stocks held by independent refiners and for strategic purposes. China's implied build suggests that global oil stocks increased by 55.7 mb (or 620 kb/d) but as always these figures are highly uncertain due to relative lack of transparency. Preliminary data for April show modest stock increases in Japan (+4.5 mb) and the US (+0.6 mb), whereas in Europe inventories fell 4 mb. Overall, OECD stocks are unlikely to have changed significantly in that month.

OECD oil inventories were revised up by 3.5 mb in January and 4.2 mb in February, reflecting upward changes for the Americas and Asia, but which were largely offset by downward revisions in Europe.


Market overview

Outright benchmark crude prices continued their upward trajectory in April due to solid oil demand, reduced OPEC output and as geopolitical events increased uncertainty over future global supply. So far this year the prices of ICE Brent and NYMEX WTI futures are both up by over $10/bbl. Relatively high Brent prices have seen Asian buyers increasingly attracted to crudes priced off WTI and Dubai, to the detriment of Russian and African grades. In the US, LTO production growth continues apace but as infrastructure constraints start to bite, WTI Midland prices are at a significant discount to WTI in Houston. Oil product prices moved up with crude, in particular US gasoline and diesel prices.



The oil market is half way into 2Q18, which is forecast to see the highest rate of refined product drawdown this year. Demand for refined products seasonally jumps 1.4 mb/d quarter-on-quarter (q-o-q), while refinery runs increase by only 0.4 mb/d to 81.2 mb/d. It is the Atlantic Basin that drives throughput increase, adding 0.7 mb/d q-o-q, while refinery maintenance peak shifts to East of Suez, where throughput declines 0.3 mb/d. In 3Q18, global refining throughput is expected to hit a fresh record at 82 mb/d, ramping up by another 0.9 mb/d q-o-q. In July-August, crude runs are expected to reach just under 83 mb/d for the first time, before a seasonal decline in September.

Product markets, however, remain short, with implied stock draws of 1.2 mb/d in 2Q18 and third-quarter counter-seasonal stock draws continuing for the second year in a row. In 3Q17, refined products stock draws were due to Hurricane Harvey's disruption of US Gulf Coast refining activity. For refiners to ramp up runs sufficiently to meet all 3Q18 demand for refined products, the global crude oil market would need to draw by 1 mb/d or more, the highest rate since 2013. But a major uncertainty is how refining margins will react to the increasingly tight crude oil markets (see Summer overheating). Margins moved higher in April in Europe and the US, but this was thanks to the seasonal uptick in gasoline cracks due to tighter summer specification. Singapore margins were lower month-on-month in the absence of a seasonal switch.