Oil Market Report: 18 January 2019

Download full reportDownload tables


  • Our estimates for global oil demand growth in 2018 and 2019 are unchanged at 1.3 mb/d and 1.4 mb/d, respectively. The impact of higher oil prices in 2018 is fading, which will help offset lower economic growth.
  • Non-OECD countries dominate oil demand growth in 2019, with the 875 kb/d seen last year accelerating to 1.15 mb/d. China and India provide 62% of the total. OECD growth will slow from 390 kb/d in 2018 to 280 kb/d in 2019. The US provides 82% of the OECD total.
  • Global oil supply fell by 950 kb/d in December, led by lower OPEC output ahead of new supply cuts. At 100.6 mb/d, supply was up 2.8 mb/d on a year ago. Following annual gains of a record 2.6 mb/d in 2018, non-OPEC production growth is set to slow to 1.6 mb/d in 2019.
  • OPEC crude oil output dropped by 590 kb/d in December, to 32.39 mb/d. Saudi Arabia cut back from record highs while Iran and Libya saw further losses. OPEC production is set to fall further in January, when new Vienna Agreement cuts take effect.
  • Global refining throughput is estimated to have reached a record high of 84.2 mb/d in December, causing refinery margins to fall, despite the slide in crude prices. The refining system will have to absorb 2.6 mb/d of new capacity this year, its largest annual increase since the 1970s.
  • OECD commercial stocks fell 2.5 mb month-on-month in November to 2 857 mb. They showed little volatility during 2018, moving within a narrow range of 60 mb and likely finishing the year 12 mb, or 0.4%, higher than at the end of 2017.
  • Benchmark crude oil futures prices fell to a 16-month low at the end of 2018. Since the beginning of 2019 they have gained over 10% and ICE Brent is currently close to $60/bbl. Well-supplied markets, particularly for gasoline and jet fuel, pressured crack spreads.

A marathon, not a sprint

Last month, we asked if there was a floor under prices following the signing of a new Vienna Agreement that aims to re-balance the oil market. Following an initial burst of enthusiasm for the deal, scepticism set in, alongside worries about the global economic background. Prices fell by $10/bbl with Brent crude oil bottoming out on 24 December at just above $50/bbl. For the producers, this was unwelcome, but for consumers it provided a nice present for the holidays. In the US Gulf Coast, gasoline prices in early January averaged $1.89/gal versus the summer peak of $2.79/gal and in India, prices are about 14% below the early October peak. Recently, leading producers have restated their commitment to cut output and data show that words were transformed into actions. In December, OPEC production fell by almost 600 kb/d and Saudi Arabia has signalled that, for its part, further significant cutbacks will take place in January and beyond.

The Brent price has moved back above $60/bbl, so the answer to our question posed last month seems to be a qualified yes, at least for now. However, the journey to a balanced market will take time, and is more likely to be a marathon than a sprint. While Saudi Arabia is determined to protect its price aspirations by delivering substantial production cuts, there is less clarity with regard to its Russian partner. Data show that Russia increased crude oil production in December to a new record near 11.5 mb/d and it is unclear when it will cut and by how much. Other non-OPEC countries joining in the output deal saw higher output, including Mexico.

Elsewhere, there are signs that market re-balancing will be gradual. The trajectory of Iran's production and exports remains important. In December, total exports increased slightly to over 1.3 mb/d. With US waivers allowing Iran's major customers to buy higher volumes than was previously thought, more oil will remain in the market in the early part of 2019. Venezuela has seen the collapse of its oil industry slow during the second half of 2018 with production falling recently by about 10 kb/d each month rather than by the 40 kb/d we saw earlier in the year. The level of output in the world's biggest liquids producer, the United States, will once again be a major factor in 2019. We saw incredible and unexpected growth in total liquids production of 2.1 mb/d in 2018. For this year, we have left unchanged for now our forecast for growth of 1.3 mb/d. While the other two giants voluntarily cut output, the US, already the biggest liquids supplier, will reinforce its leadership as the world's number one crude producer. By the middle of the year, US crude output will probably be more than the capacity of either Saudi Arabia or Russia.

For oil demand, there is a mixed picture. Falling prices in 4Q18 helped consumers and there are signs that trade tensions might be easing. In many developing countries, lower international oil prices coincide with a weaker dollar as the likelihood of higher US interest rates fades for now. However, the mood music in the global economy is not very cheerful. Confidence is weakening in several major economies. In the short term, there is added uncertainty about oil demand due to the onset of the northern hemisphere winter season, with low temperatures seen in the past few days in many places. For now, we retain our view that demand growth in 2018 was 1.3 mb/d, and this year it will be slightly higher at 1.4 mb/d, mainly due to average prices being below year-ago levels.

In the meantime, refiners face a challenging year. Processing capacity will increase by 2.6 mb/d, the biggest growth for four decades, while margins are already pressured by low gasoline cracks due to oversupply and weak demand. The well-trailed changes to the International Maritime Organisation's marine fuel regulations due in 2020 are another big issue for some refiners as they seek to find outlets for unwanted high sulphur fuel oil. By the end of the year, all industry players, upstream and downstream, may feel as if they have run a marathon.



Our estimates for oil demand growth in 2018 and 2019 remain unchanged, at 1.3 mb/d and 1.4 mb/d, respectively. October data were more or less in line with our expectations and our underlying price and economic growth assumptions are also essentially unchanged.

Global oil demand growth accelerated slightly through the end of the year from 1.3 mb/d in 3Q18 to 1.4 mb/d in 4Q18, as the negative year-on-year (y-o-y) impact of prices disappeared. Within the OECD though, there were sharp differences between regions. In OECD Asia and OECD Europe, demand contracted in the second half of the year while in the same period the US posted strong growth, supported by ethane and gasoil. Total OECD demand is thought to have increased by 390 kb/d in 2018, and in 2019, the growth will slow to 280 kb/d. Non-OECD demand was stronger, with growth accelerating in 2H18. In non-OECD Asia, demand is believed to have increased by 1 m/d in 2H18. Total non-OECD demand is projected to have increased by 875 kb/d in 2018, and this year the pace will accelerate to 1.15 mb/d.

For 2019, non-OECD Asia and OECD Americas will be the fastest growing regions. Our expectation for slightly faster global demand growth in 2019 is maintained even though economic growth is likely to be slower than in 2018. Oil prices exerted a strong negative impact on demand in 2018, when, for the year as a whole, they were 31% higher than in 2017. In contrast, based on the current futures curve, they could fall by 14% in 2019, which will provide some stimulus to demand.



A sharp fall in Saudi Arabia's output ahead of new OPEC/non-OPEC supply cuts, further unplanned outages in Iran and Libya and a seasonal drop in biofuels wiped 950 kb/d off global oil production in December. OPEC led the decline, with crude oil production tumbling 590 kb/d month-on-month (m-o-m) to 32.39 mb/d. However, global oil supply of 100.6 mb/d was still 1.7 mb/d above May, when Vienna Agreement producers began to turn up the taps to satisfy world demand and the US announced it would renew sanctions on Iran. Moreover, compared with a year ago, total oil supply was up a whopping 2.8 mb/d. The US stood 2 mb/d above 2017, Saudi Arabia was up 680 kb/d and Russia, at record levels, was 465 kb/d higher. Plentiful supply from the world's top three producers during the past several months contributed to a substantial build-up in oil inventories in 2018 and led OPEC, Russia and nine other non-OPEC countries to agree to remove 1.2 mb/d from world markets as of January.

They have their work cut out. To reach 100% compliance with pledged cuts of 800 kb/d, the 11 OPEC members party to the deal will actually have to decrease production by 900 kb/d in January. For their part, non-OPEC countries will have to cut 370 kb/d to reach full compliance. Any reductions by the Vienna Agreement countries will be supplemented by Canada, where the Albertan government imposed mandatory cuts of 325 kb/d from January. If the producers deliver on their promises, the market could return to balance in 1H19. The call on OPEC crude falls to 31.4 mb/d in 1Q19 and rises to 31.7 mb/d in 2Q19. OPEC and its allies are scheduled to meet on 17-18 April to review the Vienna Agreement that currently extends through June.

With Saudi Arabia planning still deeper cuts in January and February and Russia expected to curb supply, the US looks set to maintain its status as the world's biggest crude supplier throughout 2019. Indeed, after posting growth in 2018 of nearly 1.6 mb/d, US crude production is poised for a gain of nearly 1.1 mb/d this year. In terms of total oil, staggering US growth of 2.1 mb/d in 2018, the highest ever recorded by any country, far offset unplanned declines in Venezuela - at 625 kb/d, one of its largest annual losses - Iran, Mexico, Angola and Norway. This year, total US oil supply is expected to expand by 1.3 mb/d and account for 81% of non-OPEC growth of 1.6 mb/d. In 2018, the US drove 84% of non-OPEC's growth of 2.6 mb/d.



The global refining industry is facing a challenging 2019. This year will see the addition of 2.6 mb/d of new capacity, the largest annual increase in our records. While some of it may not start commercial operations until next year, it is also the case that some of 2018's new capacity is only ramping up now, intensifying competition between established refineries. What this means for refining margins, however, is not entirely clear. In 2018, the average Brent crude price was $16/bbl higher year-on-year (y-o-y), and margins in the three key regional hubs saw the gains from 2017 erased. The 1 mb/d of net capacity additions in 2018 was twice as large as in 2017, but throughput increased only by 0.7 mb/d as refining activity declined in Mexico and Latin America. While total oil demand growth slowed from 1.5 mb/d to 1.3 mb/d, the growth rate for refined products halved, to just 0.6 mb/d. 

In 2019, total oil demand growth will accelerate slightly versus 2018, but more importantly, refined product demand growth sees a significant rebound to 1.1 mb/d. This is close to our forecast of 1.2 mb/d growth in refining activity. However, this utilises only half of the new capacity coming on stream. If refining margins are supported by accommodating crude prices, utilisation rates will not decline. This should mean that product stocks will increase, which could be useful ahead of the IMO 2020 implementation. If average crude prices continue moving higher for the third consecutive year, refining margins may decline to levels that force slowdown in some refining regions.



OECD commercial stocks declined 2.5 mb month-on-month (m-o-m) in November to 2 857 mb. Following revisions made to October figures, this marks the second consecutive monthly decline. Inventories are now 9 mb above the five-year average. In November, crude stocks continued to expand, reaching their highest level since May, despite significantly higher refinery runs across the OECD.

Higher light tight oil (LTO) production in the US and record high Canadian output have started to overwhelm refining capacity and are having a visible impact on stocks. In OECD Americas, crude stocks rose for the fifth straight month and are now well above the five-year average. By contrast, oil product stocks declined counter-seasonally, with sharp draws in middle distillates and LPG seen in the Americas linked to frigid temperatures. Product stocks also fell counter-seasonally in Europe.

OECD commercial stocks showed little volatility during 2018, moving within a range of 2 816-2 876 mb throughout the year. In September-November, they moved by just 2 mb on average each month. Preliminary data for Europe, Japan and the US showed inventories increasing by 8.5 mb in December. If those figures are confirmed, it would mean that OECD stocks finish the year close to 2 866 mb, just 12 mb, or 0.4%, higher than at the end of 2017.

OECD inventories were revised 12.2 mb lower in October, with downward adjustments made in the Americas and Europe. OECD stocks are now estimated to have fallen 9.1 mb, the first decline registered since June. For September, OECD stocks were revised up 2.7 mb.


Market overview

Oil prices fell month-on-month (m-o-m) in December, despite the parties to the Vienna Agreement announcing production cuts at the beginning of the month. However, benchmark crude futures have gained over 10% since the start of 2019 as output cuts from major producers such as Saudi Arabia and Canada took effect. Announced mandated output reductions in Canada caused Western Canadian Select (WCS) differentials to narrow to $16/bbl at end December. In Russia, where exports are set to drop in early 2019, Urals reached a five-year high against North Sea Dated. Well-supplied markets, particularly for gasoline and jet fuel, saw prices for refined products fall faster than crude at the end of 2018. Looking ahead into 2019, major additions to refinery capacity and higher Chinese export quotas for middle distillates may continue to pressure crack spreads.