- Our estimate of 2018 oil demand growth is largely unchanged at 1.3 mb/d. Non-OECD data for September and October confirm an expected slowdown due to relatively high prices, although OECD demand has been slightly revised upwards, for 4Q18.
- Our projection for oil demand growth in 2019 remains also unchanged, at 1.4 mb/d, as the impact of lower prices is offset by lower economic growth assumptions, weakening currencies and downward revisions to certain countries e.g. Venezuela.
- Global oil supply fell 360 kb/d month-on-month (m-o-m) in November to 101.1 mb/d due lower output in the North Sea, Canada and Russia. Cuts from January reduce non-OPEC production growth for 2019 by 415 kb/d, to 1.5 mb/d, compared with 2.4 mb/d in 2018.
- OPEC crude oil output rose 100 kb/d m-o-m to 33.03 mb/d in November as Saudi Arabia and the UAE reached record highs, more than offsetting a sharp loss from Iran. The group agreed to cut output by 0.8 mb/d from January.
- Global refining throughput growth came to a halt in 4Q18, with annual losses in Latin America and Europe only just offset by gains in the US, Middle East and China. Lower crude prices helped margins, although the gasoline-focused US Gulf Coast lagged behind.
- OECD commercial stocks rose in October for the fourth consecutive month, by 5.7 mb, to 2 872 mb. They were above the five-year average for the first time since March. NGL and feedstock inventories hit a historic high whereas fuel oil stocks fell to a record low.
- Having fallen by 30% since early October, oil prices stabilised with ICE Brent close to $60/bbl and NYMEX WTI at $52/bbl. Weak demand weighed on gasoline and naphtha markets. Freight rates to transport crude and products have soared to multi-year highs.
A floor under prices?
OPEC and some non-OPEC oil ministers met in Vienna last week and agreed to curb their output by 1.2 mb/d in order to address growing surpluses in the market. The agreement aims to achieve relative stability and to bring the market towards balance. So far, the Brent crude oil price seems to have found a floor, remaining close to $60/bbl much where it was when the ministers met. Recently, prices have been volatile; in early October Brent crude oil prices reached $86/bbl on concerns that the market could tighten as Iranian sanctions were implemented. Then, thirty-seven days later, they fell back to $58/bbl as producers more than met the challenge of replacing Iranian and other barrels. Such volatility is not in the interests of producers or consumers.
Last week's meeting reminded us that the Big Three of oil - Russia, Saudi Arabia and the United States - whose total liquids production now comprises about 40% of the global total, are the dominant players. Cooperation between Russia and Saudi Arabia is now the basis of production management with these two countries having a large capacity to swing output one way or the other. For them, prices falling further would place their budgets under great stress. The third, non-playing member, so to speak, of the Big Three is the United States, which is now the world's biggest crude oil producer and where production management is a company level, economically driven decision. The United States is also the world's biggest consumer and lower prices are welcome, although its producers will want to see them stay high enough to encourage further investment.
While the US was not present in Vienna, nobody could ignore its growing influence. On the day OPEC ministers sat down to talk, an important piece of data was published: according to the Energy Information Administration, in the week to 30 November the US was a net exporter of crude and products for the first time since at least 1991. The number, 211 kb/d, is modest and even if it proves to be an isolated data point, the long-term trend is clear. In 2018 to date, US net imports have averaged 3.1 mb/d. Ten years ago, just ahead of the shale revolution, the figure was 11.1 mb/d. As production grows inexorably, so will net imports decline and rising US exports will provide competition in many markets, including to some of the countries meeting in Vienna last week.
New data in this Report shows little change to our 2018 estimates. Demand will grow by 1.3 mb/d although there are signs that the pace is slackening in some countries as the impact of higher prices lingers. As far as non-OPEC supply is concerned, our estimate for growth is revised slightly up to 2.4 mb/d. For 2019, our demand growth outlook remains at 1.4 mb/d even though oil prices have fallen back considerably since the early October peak. Some of the support provided by lower prices will be offset by weaker economic growth globally, and particularly in some emerging economies. For non-OPEC supply, we have revised our growth forecast for 2019 down by 415 kb/d, partly due to expected cuts from Russia agreed last week, and to lower growth in Canada. The serious build-up of stocks arising from logistical bottlenecks in Alberta led the provincial government to act very decisively to curb output. The initial cutback of 325 kb/d for three months to allow blockages to ease is a significant development. Apart from lowering production, it should narrow the differential between West Canadian Select prices and WTI, which reached $51/bbl at one point.
Time will tell how effective the new production agreement will be in re-balancing the oil market. The next meeting of the Vienna Agreement countries takes place in April, and we hope that the intervening period is less volatile than has recently been the case.
Our estimate of 2018 oil demand growth remains unchanged at 1.3 mb/d. Data for September and October confirm an expected slowdown due to relatively high prices seen until October. Subsequently, Brent crude oil prices have moved from $86/bbl to below $60/bbl, before recovering slightly after last week's meeting of OPEC and some non-OPEC producers. The forward curve has shifted downwards and the lower prices that are implied should help support demand in 2019. The price impact is offset, however, by slightly lower economic growth assumptions and downward revisions to our projections for certain countries impacted by weak currencies, such as Turkey, or countries facing collapse, such as Venezuela. Therefore, our projection for oil demand growth in 2019 remains unchanged, at 1.4 mb/d.
Following modest growth of 0.5 mb/d year-on-year in 2Q18, global oil demand is estimated to have expanded by 1.3 mb/d in 3Q18 and 1.6 mb/d in 4Q18. Both OECD European and Asian demand continue to be impacted by higher oil prices and a slowdown in economic activity. US demand, by contrast, is robust, supported by new petrochemical projects. Provisional data for September and October, however, point to a significant slowdown in the US, particularly for gasoline. Total OECD demand is expected to increase by 380 kb/d in 2018, with growth slowing to 290 kb/d in 2019.
Non-OECD demand has picked up noticeably according to recent data. China is still showing robust growth, and some other non-OECD countries, after summer weakness, are seeing a slight recovery. Non-OECD demand is projected to increase by 895 kb/d in 2018, accelerating to 1.1 mb/d in 2019, with Asia contributing 880 kb/d and 905 kb/d, respectively. China and India are, as always, the main sources of growth.
Global oil supply fell 360 kb/d month-on-month (m-o-m) in November to 101.1 mb/d due to outages in the North Sea and Canada and as Russia pulled back from record levels. Saudi Arabia and the UAE, however, cranked up to historic highs in the run-up to a new OPEC/non-OPEC agreement to curb output (see OPEC and non-OPEC allies agree new supply cut).
The backdrop to the supply cut decision was one of abundant output with the world's top three producers all pumping at or near their highest ever. Since May, when US sanctions were announced and Vienna Agreement producers began to unwind cuts, global oil output has soared by a net 2.2 mb/d. The US, with its relentless growth, has provided more than 1.1 mb/d, Saudi Arabia has ramped up by over 1 mb/d and Russia has increased by 400 kb/d.
As a result, stocks have been building with the potential for significant oversupply next year. By agreeing a cut of 1.2 mb/d, and additional output curbs in Canada (see Alberta orders mandatory output cuts to shore up domestic crude prices), producers may go some way towards restoring balance to the world market. Forecast non-OPEC supply growth for 2019 has been reduced by 415 kb/d since last month's Report, to 1.5 mb/d, compared with growth of 2.4 mb/d expected this year. In November, non-OPEC production, at 61.1 mb/d, was up 1.9 mb/d on a year ago.
As for OPEC, the group's crude production in November rose by 100 kb/d to 33.03 mb/d in the run-up to the meeting in Vienna. Saudi Arabia's unprecedented crude oil production of nearly 11.1 mb/d left it tied with Russia as the world's second biggest producer of crude and condensates. That rank may prove short-lived as production in December is expected to fall to around 10.7 mb/d.
Growth in global refining throughput is expected to have come to a sudden halt in 4Q18, as Latin America's 530 kb/d year-on-year (y-o-y) decline, combined with the expectation of lower activity in Europe are only just offset by growth in China, the Middle East and the US. While record US run rates this year are widely discussed, most other regions in the Atlantic Basin have seen reduced throughput. Indeed, the only instance of annual growth in the Atlantic Basin this year, in 3Q18, was largely due to the y-o-y rebound effect in the US from the Hurricane Harvey. For 2018 as a whole, the net effect of continued strong US throughput growth and declines in Mexico, Latin America and Europe, is a 0.3 mb/d annual decline in the Atlantic Basin, compared to 0.5 mb/d growth in 2017. Global throughput, however, is up 0.7 mb/d y-o-y, thanks to the sustained growth East of Suez, namely in China (up by 0.6 mb/d) and the Middle East (0.3 mb/d).
In 2019, the Atlantic Basin is expected to return to modest growth, with Mexico, Canada and Europe recovering. China and the Middle East will continue to drive most of the volumetric growth. The US is already close to a ceiling as its high utilisation rates show.
Historical estimates for several countries have been revised in this report, notably Iran and Algeria, to include condensate splitter intake. This has increased the baseline estimate, by about 0.2 mb/d in 2018.
OECD commercial stocks rose for the fourth straight month in October, by 5.7 mb, to reach 2 872 mb. They stood at their highest level since January and were for the first time in several months above the five-year average, by 11 mb. In October, OECD refiners usually reduce their crude purchases and throughput rates, leading to an overall crude build and a much bigger fall in oil product inventories (and an overall oil stock draw). However, this time, crude stocks built more than usual and, in the process, more than offset seasonal draws in oil product inventories.
OECD crude stocks gained 46.4 mb in October to 1 085 mb. This was the largest monthly stock increase since March 2015, at the peak of global crude oversupply, and almost three times as much as normal for the time of year. This was caused by a combination of factors: a steep fall in refining activity in the US and Japan, higher North American crude production and steady crude imports in Japan and Korea.
NGL and feedstock inventories rose by a modest 2.3 mb month-on-month (m-o-m). Even so, they hit their highest level since IEA records began in 1980. This is a structural, rather than cyclical increase, driven by higher US oil and gas production. NGL stocks have been more or less stable in other OECD regions. By contrast, OECD fuel oil stocks dropped to a fresh historic low, as volumes fell further in Europe and Asia Pacific. Most of the downward adjustment for fuel oil in the past few years has occurred in Europe owing to lower output at Russian refineries and regulatory initiatives to move to gasoil bunkering for ships sailing in European waters. The transition away from fuel oil for all vessels from the start of 2020 will incentivise European stockholders to reduce their fuel oil volumes further. At the same time, it will create additional surpluses at refineries.
Middle distillate inventories declined the most of any category, by 29.7 mb m-o-m, to 535 mb. While this is largely in line with seasonal patterns, it means that stocks remain below the five-year average ahead of the key winter heating season. Gasoline stocks fell seasonally, by 5.6 mb to 373 mb, and 'other products' decreased 6.6 mb to 418 mb.
Preliminary data for November are mixed, as a build in Japan offset moderate stock falls in Europe and the US. Japan's total oil stocks increased 10.6 mb because of higher refining activity and warm weather, while in the US, oil stocks fell seasonally, by 6.2 mb m-o-m. European inventories fell 3.6 mb m-o-m.
OECD inventories were revised down 9.4 mb in September as lower figures for Europe and Asia Oceania offset higher estimates for the Americas. August OECD stocks were revised up, by 1 mb.
After falling for nine consecutive weeks, oil prices ticked up in the first week of December as OPEC and some non-OPEC producers reached an agreement to cut supplies. A government-mandated output cut in Canada saw local crude prices rebound from record lows. Meanwhile, prices for sour grades such as Urals and Maya strengthened, alongside fuel oil cracks, as supplies from Iran and Venezuela continued to fall. In products markets, weak demand for gasoline and naphtha saw cracks hit multi-year lows. Freight rates to ship crude and products soared. Weather delays, strong demand and changing trade patterns as US crude and product exports grow contributed to the gains.