Oil Market Report: 10 August 2018

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  • Following strong demand growth in 1Q18, in 2Q18 and 3Q18 the pace has slowed dramatically to a relatively subdued 1 mb/d. In 4Q18 we expect a rebound and demand will be 100.2 mb/d.
  • For 2018, our global demand growth outlook is unchanged at 1.4 mb/d. In 2019 growth accelerates slightly to 1.5 mb/d, but there are risks to the forecast from escalating trade disputes and rising prices if supply is constrained.
  • Global oil supply rose by 300 kb/d in July to 99.4 mb/d, 1.1 mb/d above a year-ago. Compliance with the Vienna Agreement eased to 97% in July as output cuts were relaxed. Non-OPEC production is expected to grow by 2 mb/d in 2018 and by 1.85 mb/d next year.
  • OPEC crude oil output was steady in July, at 32.18 mb/d. An unexpected decline in Saudi Arabian supply was offset by higher production from the UAE, Kuwait and Nigeria. OPEC compliance was unchanged in July at 121%.
  • OECD commercial stocks fell seasonally by 7.2 mb in June to 2 823 mb and were 32 mb below the five-year average. Stocks at the end of 2Q18 were up 6.6 mb versus end-1Q18, the first quarterly increase seen since 1Q17. Outside the OECD, inventories were also mostly higher during the quarter.
  • ICE Brent prices fell in July on higher global output, while NYMEX WTI prices rose on strong US refining and exports. Both benchmarks are up 50% y-o-y. The Brent/WTI differential in July narrowed sharply versus June.
  • Global refinery throughputs in 2H18 are expected to be 2 mb/d higher than in 1H18. Due to high summer demand, refined products stocks will draw before building again in 4Q18. The outlook will be heavily influenced by Iranian crude flows and resulting changes to crude prices and margins.

Cooling down

As suggested in last month's Report, the northern hemisphere summer has proved to be anything but quiet. Record high temperatures are causing various disruptions: low water levels in the Rhine are hampering barge traffic, refinery operations are impacted in certain locations, warm water is affecting nuclear power plants, and air-conditioning demand is soaring. Record temperatures are unlikely to influence significantly road and air transport demand one way or the other as holiday plans were typically made many weeks or months ago, but the sunny weather might provide a short-lived, modest boost. New data will show us in due course.

Meanwhile, concerns about the stability of oil supply have cooled down somewhat, at least for now. We have seen increases in production, mainly in Saudi Arabia and Russia, a surge in US exports in June that saw a record weekly average level of 3 mb/d, and a partial, but fragile, recovery in Libya. Ample supply has contributed to the Brent price falling from just over $79/bbl at the end of June to below $72/bbl earlier this week. This cooling down in prices is clearly welcome for consumers: the biggest single product market in the world is US gasoline and the national average price increase seen during the spring seems to have stalled for the time being.

With so much focus on geopolitics in recent months, underlying demand trends have perhaps received less attention but there are interesting developments. As far as growth is concerned, the global number for 2018 looks solid for now at 1.4 mb/d. However, this is heavily influenced by demand in 1Q18 when growth was more than 1.8 mb/d, mainly due to low temperatures in the northern hemisphere. As we move through 2Q18 and 3Q18, growth is estimated at only 1 mb/d, partly due to comparisons with high year-ago demand levels and because prices (based on Brent crude) have typically been about 45% higher. In OECD Europe, oil demand fell below last year's level in 2Q18, and in the US falling gasoline demand has contributed to more than the halving of total demand growth in 2Q18 versus 1Q18. The two leading non-OECD oil markets, China and India, both remain on course to grow solidly this year, although data issues with respect to China cloud the picture to some extent. As mentioned in recent editions of this Report, some developing countries are taking steps to shield consumers from higher prices. An example is Indonesia where plans are being made to increase sharply subsidies to maintain diesel and gasoline prices at current levels.

For 2019 demand growth, we have actually revised our outlook slightly upwards by 110 kb/d, partly influenced by the downward move of the forward price curve. Even so, there are considerable uncertainties. The risks to stable supply that will grow later this year could cause higher prices and thus impact demand growth. Another factor to consider is that trade tensions might escalate and lead to slower economic growth, and in turn lower oil demand. Trade tensions partly explain why the International Monetary Fund, in its recent World Economic Outlook Update, said, "The balance of [economic] risks has shifted further to the downside, including in the short term". For now, we have made no changes to our underlying economic and oil demand assumptions, but we are mindful that demand growth could cool down later this year and into 2019. If this does happen, it might dampen to some extent the impact on prices of any supply pressures.

The recent cooling down of the market, with short term supply tensions easing, currently lower prices, and lower demand growth might not last. When we publish our next report in mid-September, we will be only six weeks away from the US's deadline for Iran's customers to cease oil purchases. As oil sanctions against Iran take effect, perhaps in combination with production problems elsewhere, maintaining global supply might be very challenging and would come at the expense of maintaining an adequate spare capacity cushion. Thus, the market outlook could be far less calm at that point than it is today.



After a very strong start to the year, with 1Q18 global oil demand growth of 1.8 mb/d, recent data point to a sharp slowdown in 2Q18, largely due to slower OECD demand. Data for May and June showed a significant year-on-year (y-o-y) decline in European oil demand and a slowdown in US growth. European oil demand is estimated to have declined by 120 kb/d y-o-y in 2Q18, and in the US, growth has slowed from 745 kb/d in 1Q18 to 245 kb/d in 2Q18. Overall, world demand growth in 2Q18 is estimated at only 750 kb/d. The strong y-o-y increase in oil prices is partly responsible for the slowdown. Brent crude oil prices in 2Q18 were on average 50 % higher than last year, and this was partly passed through to end-users. In addition, currency depreciation in some countries amplified the impact of higher oil prices.

Oil demand growth is expected to remain relatively subdued in 3Q18 before rebounding in 4Q18. Growth is projected to slow to below 1 mb/d in 1Q19, from a high 2018 base, on the assumption of a return to normal weather conditions. As the impact of rising prices in 2018 falls away, robust economic growth will support an acceleration of close to 2 mb/d y-o-y in 2Q19. Overall, world oil demand is expected to increase by 1.4 mb/d in 2018 and 1.5 mb/d in 2019.

OECD Americas oil demand growth is projected at around 400 kb/d in 2018, supported by a very strong start to the year reflecting harsh weather conditions and the start-up of petrochemical projects in the US. More ethane crackers coming on stream should support OECD Americas growth at 160 kb/d in 2019. OECD Europe demand is set to remain stagnant in 2018, and to increase by 140 kb/d in 2019. OECD Asia Oceania oil demand will post small declines in both 2018 and 2019. Overall, total OECD oil demand growth should slow from 360 kb/d in 2018 to 250 kb/d in 2019.

Non-OECD oil consumption should increase by 1 mb/d in 2018, slightly lower than the 1.12 mb/d level seen in 2017, as rising prices cap growth. In 2019, however, as the impact of higher prices ebbs, non-OECD demand growth is set to accelerate to 1.23 mb/d. Asia will be the largest contributor, with growth of 0.93 mb/d in 2018 and 0.87 mb/d in 2019.


Global oil supply rose in July by 300 kb/d to 99.4 mb/d as Russia, Kuwait and the UAE pumped more after Vienna Agreement producers decided to relax output curbs. Saudi Arabia surprised by lowering output - apparently because of slower demand for its crude. The 24 countries party to the January 2017 pact agreed to work towards 100% compliance with supply cuts of 1.72 mb/d from July and, according to IEA estimates, overall compliance fell to 97% in July. Non-OPEC compliance sank to 44%, thanks to Russia's sharp production increase and continued non-compliance by Kazakhstan while OPEC's rate remained at 121%.

Saudi Arabia and Russia said the accord would result in an actual supply increase of around 1 mb/d from those with the capacity to produce it - largely four countries: Saudi Arabia, Russia, the UAE and Kuwait. Since April, when unintentional declines in Venezuela, Angola and Mexico raised the overall cut to 2.5 mb/d, these four producers increased output by nearly 900 kb/d by July. However, the overall increase by the producer alliance was just 100 kb/d m-o-m from June.

The challenge for these four producers will be to compensate for further losses that could tip the global market into imbalance. A cash crisis and chronic mismanagement have already cut Venezuelan crude supply by 350 kb/d since the start of this year and there is no sign of recovery. While there has been minimal impact so far on Iran's crude production ahead of renewed US sanctions, Washington's move to apply the toughest ever measures on Iran could result in an even steeper reduction than the 1.2 mb/d seen during the previous round of sanctions.

Global oil supply for now looks healthy. Strong non-OPEC growth, fuelled by the US, has pushed output up 1.1 mb/d year-on-year (y-o-y). Non-OPEC supplies in July were up 1.9 mb/d on a year ago. For 2018 as a whole, non-OPEC output is expected to expand by nearly 2.0 mb/d, with growth easing only marginally to 1.85 mb/d in 2019. In July, OPEC's total oil supply was down 850 kb/d compared to a year ago, with Venezuela lower by 810 kb/d, Libya 330 kb/d and Angola by 200 kb/d. Reduced Saudi flows and further declines elsewhere were largely offset by higher output from Kuwait, the UAE and Nigeria - keeping crude output steady month-on-month (m-o-m) at 32.18 mb/d.



OECD commercial stocks fell 7.2 mb month-on-month (m-o-m) in June to 2 823 mb, the eighth fall in the last 11 months. The reduction was in line with seasonal patterns. OECD stocks were 32 mb below the five-year average at the end of the month, marking another widening of the deficit, and covered 59.2 days of forward demand, down 4.2 days year-on-year (y-o-y). Stocks were broadly unchanged in the OECD Europe and Asia Oceania regions. Instead, most of the action took place in the Americas, where crude stocks declined sharply because of record high refinery throughput and crude exports. This was partially offset by a rise in LPG stocks. Middle distillates gained 2.4 mb m-o-m, but remained below the five-year average, while fuel oil stocks fell 4.6 mb and were close to a historical low.

We now have complete data for 2Q18 showing that OECD commercial oil stocks were up a touch with moderate gains registered in the Americas and Asia Oceania regions and a decrease in Europe. This puts a stop to four consecutive quarters of OECD stock falls since 1Q17 (OECD government stocks fell 6.2 mb during 2Q18, but this was less than commercial inventory gains). Over the first half of 2018, industry stocks were still down 30.6 mb (170 kb/d) due to the reduction registered in 1Q18. Outside the OECD, the data is mixed with lower stocks in Singapore and higher holdings in countries reporting to JODI, Fujairah and in China, as well as higher volumes of oil in transit (See Oil in transit rises in response to Vienna Agreement). While China has not published commercial stocks data for the past two months, its high crude imports imply a crude build during the first half of 2018, which is nonetheless less significant than the implied crude stock gain registered over 1H17.

For July, preliminary data show that commercial stocks moved little in the US and Japan, while figures for Europe moved up 3.9 mb.

Revised data for OECD oil inventories showed decreases versus preliminary numbers. May OECD stocks were revised down by 10.3 mb largely because of a change in the Americas. April OECD stocks were revised down by just 0.5 mb.


Market overview

Higher global output, and a continued oversupply of lighter crudes, saw outright ICE Brent prices fall by $5.19/bbl over the course of the month, to $74.25/bbl on 31 July. While NYMEX WTI prices declined for four consecutive weeks, on average July prices were up $3.26/bbl m-o-m, having received a boost early in the month due to an unplanned outage in Canada and strong US refinery activity. The narrowing of the Brent-WTI and Brent-Dubai Exchange of Futures for Swaps (EFS) spreads has increased the competitiveness of crudes linked to Brent prices and we saw a pick-up in demand for North Sea and West African grades. In recent months, these crudes have struggled to find buyers as refiners had turned to relatively cheap US exports that have been flooding onto the market. Now in the season of peak demand, prices for refined products, in particular gasoline, diesel and fuel oil, held up against declining crude oil prices.



Global refining intake has accelerated as it enters the usually more active second half of the year. Even with an upward revision to our 1Q18 and 2Q18 throughput estimates (170 kb/d and 60 kb/d, respectively) and a 160 kb/d downward revision to 3Q18 forecast, runs in the second half of 2018 are almost 2 mb/d higher than in the first half. Throughput is forecast to peak in 4Q18 with the expectation of maintenance concentrated in September and new capacity ramping up towards the end of the year. This will help replenish refined product inventories, resulting in a stock build in 4Q18 (the only one this year), while for the year as a whole refined products will draw by 0.2 mb/d. In 2018, refining throughput is forecast to increase by 0.9 mb/d, just under the 1 mb/d growth in refined products demand.

Our throughput forecast in 4Q18 may yet be revised downward, depending on crude pricing and refining margins under the US sanctions against Iranian exports. An absence of product builds in 4Q18 will further stretch market fundamentals in 2019, prior to the International Maritime Organisation's fuel specification changes to be implemented in 2020.