Oil Market Report: 14 November 2018

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  • The outlook for global oil demand growth is largely unchanged at 1.3 mb/d in 2018 and 1.4 mb/d in 2019, as a weaker economy is largely offset by lower oil prices. OECD demand is expected to increase by 355 kb/d in 2018, slowing to 285 kb/d in 2019.
  • Oil demand is slowing in several non-OECD countries, as the impact of higher year-on-year prices is amplified by currency devaluations and slowing economic activity. Our non-OECD demand forecast has been revised down by 165 kb/d for 2019.
  • Global oil supplies are growing rapidly, as record output from Saudi Arabia, Russia and the US more than offsets declines from Iran and Venezuela. October output was up 2.6 mb/d on a year ago. Non-OPEC output will grow by 2.4 mb/d this year and 1.9 mb/d in 2019.
  • OPEC crude output rose 200 kb/d in October to 32.99 mb/d, up 240 kb/d on a year ago. Losses of 0.4 mb/d from Iran and 0.6 mb/d from Venezuela were offset by increases from others. The call on OPEC crude falls to 31.3 mb/d in 2019, 1.7 mb/d below current output.
  • After a refine products stocks build of 0.7 mb/d in 3Q18, October refining margins plunged to the lowest levels since 2014. Global refinery throughput is also likely to exceed refined product demand both in 4Q18 and into 2019.
  • OECD commercial stocks rose counter-seasonally by 12.1 mb in September to 2 875 mb. In 3Q18, stocks increased by 58.1 mb (630 kb/d), the largest gain since 2015. OECD holdings are likely to exceed the 5-year average when October data is finalised.
  • ICE Brent prices hit a four-year high of over $86/bbl at the beginning of October but have since fallen back to below $70/bbl. Brent and WTI futures curves have flipped to contango. Except for gasoline and naphtha, product prices did not match the drop in crude prices.

Heeding the warnings

In last month's Report, we noted that since the middle of the year oil supply had increased sharply, with gains in the Middle East, Russia and the United States more than compensating for falls in production in Iran, Venezuela and elsewhere. New data show that the pace has accelerated, and this higher output, in combination with Iranian sanctions waivers issued by the US and steady demand growth, implies a stock build in 4Q18 of 0.7 mb/d. Already, OECD stocks have increased for four months in a row, with products back above the five-year average. In 1H19, based on our outlook for non-OPEC production and global demand, and assuming flat OPEC production (i.e. losses from Iran/Venezuela are offset by others), the implied stock build is currently 2 mb/d.

In the August edition of this Report we described the replacement of Iranian and Venezuelan barrels as "challenging", and that there was a danger of prices rising too high too fast. Producers have heeded the warnings and more than met the challenge and today, the Big Three, Russia, Saudi Arabia and the United States, all see output at record levels. Total non-OPEC production in August, the latest month for which we have consolidated data, was 3.5 mb/d higher than a year ago, with the United States contributing an extraordinary 3.0 mb/d. Russia's crude output has hit a new record of 11.4 mb/d, with companies suggesting that they could produce even more.

In early October, the price of Brent crude oil reached a four-year high above $86/bbl, reflecting the legitimate fears of market tightness. In our view, this was a dangerous "red zone" and it justified calls for producers to raise output. Today, the price has fallen to a more reasonable level close to $70/bbl, well below where it was in May before the US announced its change of policy on Iran. Lower prices are clearly a benefit to consumers, especially hard-pressed ones in developing countries that are suffering from the additional handicap of weak national currencies. For now, forecasts of oil demand growth remain solid with an increase of 1.3 mb/d this year and an increase to 1.4 mb/d in 2019, even though the macro-economic outlook is uncertain.

We should also recognise the interests of the producers. For many countries, even though their output might have increased, prices falling too far are unwelcome. Ministers from the Vienna Agreement countries will meet in early December, but we have already seen suggestions from leading producers that supply could be cut soon if customers, seeing ample supply, rising stocks, and slumping refining margins, request lower volumes.

Although the oil market appears to be more relaxed than it was a few weeks ago, and there might be a sense of "mission accomplished" that producers have met the challenge of replacing lost barrels, such is the volatility of events that rising stocks should be welcomed as a form of insurance, rather than a threat. The United States remains committed to reducing Iranian oil exports to zero from the 1.8 mb/d seen today; there are concerns as to the stability of production in Libya, Nigeria and Venezuela; and the tanker collision last week in Norwegian waters, although modest in impact, is another reminder of the vulnerability of the system to accidents.

The response to the call by the IEA and others to increase production is a reminder that the oil industry works best when it works together. Regular contacts between key players are essential in creating understanding, and even though oil diplomacy has succeeded so far this year, it needs to be maintained to ensure market stability.



The outlook for global oil demand growth is largely unchanged since last month's Report, at 1.3 mb/d in 2018 and 1.4 mb/d in 2019 as a deteriorating outlook for the global economy is largely offset by the fall in Brent crude oil prices from $86/bbl early in October to around $70/bbl at the time of publication. After posting a lacklustre 0.5 mb/d of growth in 2Q18, global oil demand expanded by 1.5 mb/d in 3Q18. Both European and OECD Asian demand continues to be relatively weak, reflecting the fact that prices remain significantly higher than a year ago and a slowdown in economic activity. US demand, by contrast, is very robust, albeit slowing towards the end of 3Q18, according to provisional data. Total OECD demand is expected to increase by 355 kb/d in 2018, with growth slowing to 285 kb/d in 2019. Recent data also point to a slowdown in non-OECD demand. While China is still showing robust growth, some other non-OECD countries have been impacted by higher oil prices, amplified by depreciating currencies, and deteriorating economic activity. India, Brazil, and Argentina, are notable examples. Total non-OECD demand is projected to increase by 950 kb/d in 2018, accelerating to 1.1 mb/d in 2019.

OECD Americas oil demand is projected to increase by 445 kb/d in 2018, supported by harsh weather conditions in 1Q18, as well as booming industrial activity and the start-up of petrochemical projects in the US. The strong year-on-year (y-o-y) increase in oil prices seen in 2018 is, however, affecting gasoline demand, which is forecast to contract by 30 kb/d in 2018. More ethane crackers coming on stream and recently lower oil prices should continue to support OECD Americas growth of 200 kb/d in 2019.

OECD Europe's demand is less robust, and, after growth of 230 kb/d y-o-y in 1Q18, there were declines of 100 kb/d in 2Q18 and 65 kb/d in 3Q18. For the year as a whole, demand is set to decline by 5 kb/d on very weak gasoil and naphtha deliveries but a more favourable price environment is expected to support growth of 145 kb/d in 2019. OECD Asia Oceania oil demand will post small declines in both 2018 and 2019. Overall, total OECD oil demand growth is projected at 360 kb/d in 2018 and 285 kb/d in 2019.

Non-OECD oil consumption should increase by 950 kb/d in 2018, and the pace will accelerate to 1.1 mb/d in 2019. Asia remains the main source of growth, contributing 0.9 mb/d in 2018 and 0.82 mb/d in 2019, with China and India the dominant markets.



The world's top three oil producers, Russia, the US and Saudi Arabia, are pumping at record levels, holding supply above 100 mb/d even as Iranian output tumbles due to US sanctions and as others post further losses. Storage tanks are filling up as global oil supply far outpaces demand, prompting talk of a possible 1 mb/d OPEC/non-OPEC production cut. Saudi Arabia's record rates of production are likely to be short-lived, having signalled an export cut of 0.5 mb/d in December due to lower seasonal demand. Next year, there is expected to be even less need for OPEC oil due to relentless growth in non-OPEC supply. Continued expansion in the US and Russia and a return to growth in Brazil, is underpinning non-OPEC growth of 1.9 mb/d, following gains of 2.4 mb/d this year. As a result, the call on OPEC crude falls to an average 31.3 mb/d in 2019, nearly 1.7 mb/d lower than current output.

The US, with jaw-dropping year-on-year (y-o-y) growth of nearly 3 mb/d in August, shows little sign of slowing down despite infrastructure bottlenecks. Total oil supply in August surged above 16 mb/d for the first time ever, including crude and condensate output of 11.3 mb/d. This meant that the US overtook Russia as the world's largest crude producer. US production hit 11.6 mb/d by early November. Russian crude output is also rising, in October reaching 11.4 mb/d, nearly 0.5 mb/d higher than a year ago and companies are signalling they could raise output further next year as projects come on line.

In October, world oil production of 100.7 mb/d remained broadly steady on the previous month, but was 2.6 mb/d higher than a year ago. Non-OPEC countries accounted for much of the increase, although OPEC oil supply was up 380 kb/d (y-o-y). Crude oil production from OPEC rose to 32.99 mb/d, the highest since July 2017, as record levels from the UAE and Saudi Arabia more than made up for a further decline in Iran. In the short term, supply from Iran could hold up better than expected after the US granted waivers to eight countries, including major buyers China and India (see US Waivers keep Iran oil flowing, for now).

Since May, when US sanctions were announced and Vienna Agreement producers began to unwind cuts, global oil output has soared by a net 1.8 mb/d. The US, with its relentless growth, has provided more than 1 mb/d, Saudi Arabia has ramped up by 620 kb/d and Russia has increased by 445 kb/d. Such record-setting rates have more than made up for declines from Iran (-480 kb/d), Venezuela (-140 kb/d) and seasonal declines in Canada (-200 kb/d) and Kazakhstan (-100 kb/d).



In October, some of the indicative refining margins fell to their lowest levels since 2014, driven by sharply higher crude oil prices and a build-up in refined product stocks. The precipitous drop was halted only by the return of Brent crude prices to around $70/bbl in November. For the first time in three years, refiners had 3Q18 throughput at levels sufficient to not only cover the seasonal peak in refined products demand, but also to build stocks. Global throughput was up 1.5 mb/d year-on-year (y-o-y), and 2 mb/d quarter-on-quarter (q-o-q), resulting in the highest refined product stock builds since 3Q14.

Moreover, with runs now set to increase 2.7 mb/d from October to December, and refined product demand seasonally flat, barring extreme cold weather in the northern hemisphere, product inventories are expected to continue building. To incentivise runcuts, complex refining margins would need to fall again and remain at barely positive levels for the rest of the quarter. However, after an estimated 670 kb/d draw in 3Q18, crude markets look oversupplied in 4Q18. Consequently, lower crude prices may prevent margins from deteriorating further. Our forecast for 2019 runs remains unchanged, with annual growth at 1.2 mb/d, resulting in a 0.5 mb/d refined product stock build. Key pressure points for next year will be continued weakness in the light distillates complex (see Margins) and the ability of incremental US shale barrels to find a home (see OECD refinery throughput).



OECD commercial stocks rose counter-seasonally by 12.1 mb month-on-month (m-o-m) in September to 2 875 mb. As in recent months, oil products drove the increase, rising by 21.3 mb to a 14-month high of 1 478 mb. However, this time higher refining activity was not responsible. Instead, the reason was strong LPG restocking in North America, linked to subdued demand for crop drying and a surge in supply, as well as a slowdown in demand for oil products across the OECD. Crude stocks, by contrast, fell by 10.7 mb m-o-m to 1 054 mb, to their lowest level since January 2015, on lower imports from Russia, Saudi Arabia and the UAE. Higher crude production from the US and Canada has so far failed to arrest the downtrend.

September's increase means OECD stocks are now likely to rise above the five-year average when October data is finalised, for the first time since March when OPEC hit its target of reducing stocks to this level. Inventories were just 8 mb below the average at the end of September and preliminary October data show holdings in Europe, Japan and the US up counter-seasonally, even if moderately.

During 3Q18, OECD industry stocks increased by 58.1 mb (630 kb/d), the largest quarterly gain in three years. The Americas region was largely responsible, contributing an increase of 59.9 mb. OECD middle distillate inventories rose by a significant 49.5 mb, followed by other products (+37.6 mb) while gasoline stocks drew much less than the norm (-0.7 mb). All this was the result of record high refinery runs in the US (with utilisation reaching 95% during the quarter) amid strong demand for product exports and lower crude prices. Periods of high refinery activity usually result in crude stock draws, even if, higher production in Canada and the US limited the effect this year. Crude inventories fell 35.3 mb, compared with 49.4 mb a year ago.

Outside the OECD, crude stocks are likely to have fallen amid higher refinery runs. Figures available from Kayrros for 47 countries show an overall 11.8 mb drop in non-OECD crude stocks during 3Q18, while JODI data for non-OECD NGL and product stocks point to a moderate 7.5 mb gain up until the end of August. We also estimate that seaborne oil in transit volumes were down 25.9 mb during the quarter, due to lower crude exports from Iran and Angola as well as reduced fuel oil exports from European and Middle Eastern refiners to Southeast Asia, using Refinitiv (formerly Reuters) data.

In all, we estimate, based on available data, that global oil stocks increased by 22.8 mb (250 kb/d) during 3Q18. This compares with a build of 890 kb/d in our balances, implying that oil stocks are likely to have risen by 640 kb/d in non-OECD countries not represented in the above table. In practice, this is likely to have occurred largely in oil product stocks, owing to the global increase in refinery runs during 3Q18.

For August, OECD inventories were revised up by 9.5 mb. The largest revisions were in Europe and the Americas, whereas in Asia Oceania the number was reduced. For July, OECD stocks were revised down.


Market overview

Falling outright crude prices and futures curves flipping into contango indicate that the market has loosened in the past month. Increases in output from OPEC producers, Russia and the US have more than offset falls in Iran and Venezuela. Concern that oil demand growth may slow due to higher prices and weaker economic growth has also weighed on markets. Furthermore, oil price movements have been closely linked to equity market volatility. In the US and Canada, infrastructure constraints continue to be responsible for large discounts for affected grades. Appetite for Brent-linked crudes was boosted by the relative weakening of the North Sea benchmark compared to Dubai. Gasoline prices fell faster than crude as demand slowed seasonally, while other products, such as diesel and jet fuel, held up better.