Oil Market Report

Data, forecasts and analysis on the global oil market

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The IEA Oil Market Report (OMR) is one of the world's most authoritative and timely sources of data, forecasts and analysis on the global oil market – including detailed statistics and commentary on oil supply, demand, inventories, prices and refining activity, as well as oil trade for IEA and selected non-IEA countries.


Oil Market Report: 15 May 2019

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Highlights

  • Our 2018 oil demand growth estimate has been revised down by 70 kb/d to 1.2 mb/d and our 2019 forecast is reduced by 90 kb/d to 1.3 mb/d. Revisions for 2018 impacted mainly non-OECD Asia and African countries. The 2019 revision is seen in OECD Asia in 1Q19.
  • Non-OECD countries will drive global oil demand in 2019, adding 1.1 mb/d of growth, with China and India growing by 0.7 mb/d. Net OECD growth will be 0.2 mb/d, led by the US. Global oil demand will average 100.4 mb/d in 2019.
  • In April, global oil supply fell 300 kb/d, with Canada, Kazakhstan, Azerbaijan and Iran leading the losses. At 99.3 mb/d, output was up 775 kb/d on a year ago. In 2019, non-OPEC supply will grow 1.9 mb/d versus 2.8 mb/d last year.
  • OPEC crude output rose 60 kb/d in April to 30.21 mb/d as higher flows from Libya, Nigeria and Iraq offset Iranian losses. Effective spare capacity was 3.2 mb/d, with Saudi Arabia holding 70%. The call on OPEC is 30.9 mb/d in 2Q19, falling to 30.2 mb/d for 2H19.
  • In 2Q19, refining throughput is seeing a third consecutive quarter of lacklustre growth, but is expected to climb by 1 mb/d a month between May and August. A limited impact on refining activity in Europe is expected from the Druzhba pipeline disruption.
  • OECD oil stocks fell by 25.8 mb in March to 2 849 mb, more than the five-year average of 4 mb owing to counter-seasonal crude draws. In days of forward demand, stocks amount to 59.8 days, their lowest level since July 2018.
  • ICE Brent rose to a five-month high of $74.57/bbl in late April after the end of US waivers on Iranian exports, but has since fallen by 6%. Gasoline strengthened in April ahead of the peak demand season. Cracks for other products fell due to higher crude prices.

Markets remaining calm

The theme we identified in last month's Report of "mixed signals" is appropriate again this month, with geopolitics and industry disruptions confusing the supply outlook, and the first change to our 2019 demand outlook for several months. The ongoing geopolitical supply concerns around Libya, Iran, and Venezuela have been joined in the past few days by the attacks on shipping off Fujairah and on two pumping stations in Saudi Arabia. At the time of writing, there is no disruption to oil supplies and prices are little changed. The IEA is monitoring the situation, particularly in view of the proximity of Fujairah to the strategically vital Strait of Hormuz. We are also monitoring the impact of the contamination of Russian crude oil passing through the 1.4 mb/d Druzhba pipeline system. The issue will be resolved in due course, eased by commercial and government stock draws by Russia's customers. One consequence could be a loss of confidence in the quality of the crude flows and thus a search, where feasible, for alternative supplies that could intensify price pressures for heavy/medium sour crude oil.

Despite the difficult geopolitical backdrop and other supply problems, headline oil prices are little changed from a month ago at just above $70/bbl for Brent. In the intervening period, the decision by the United States to cease the waiver programme for buyers of Iran's crude oil did see Brent briefly reach $75/bbl. However, there have been clear and, in the IEA's view, very welcome signals from other producers that they will step in to replace Iran's barrels, albeit gradually in response to requests from customers. There is certainly scope for other producers to step up production with our data showing that in April parties to the Vienna Agreement collectively produced 440 kb/d less than they promised, with Saudi Arabia producing 500 kb/d below its allocation. Of course, as we wrote in the February edition of this Report, there are quality issues for refiners used to processing Iranian barrels and the fact that increases in output come at the cost of reducing the global spare capacity cushion.

In this Report, there is a modest offset to supply worries from the demand side. Our headline growth estimate for 2019 has changed little since the middle of last year, but this month we cut it by 90 kb/d to a still healthy 1.3 mb/d. The reduction is mainly concentrated in 1Q19 on weaker than expected data for Brazil, China, Japan, Korea, Nigeria, and elsewhere lowering growth by 410 kb/d versus our last Report. Even so, slower demand growth is likely to be short-lived, as we believe that the pace will pick up during the rest of the year. An important implication of our revised demand data is that in 1Q19 the oil market saw an implied surplus of supply over demand of 0.7 mb/d, which was higher than previously suggested. As we move through 2Q19, while there is considerable uncertainty on the supply side, it is highly likely that the implied balance will flip into an indicative deficit of about the same size. Stocks in the OECD at the start of April have fallen back to the level seen in July in terms of days of forward cover and other stock indicators are pointing in the same direction.

For now, despite all the supply uncertainty, headline Brent oil prices are little changed from a month ago. However, the backwardation has steepened considerably and front month prices are about $3/bbl higher than for six months out. The decline of 230 kb/d in the North Sea loading programme for June versus May, although not a surprise, is another important factor adding to overall concerns about supply. Elsewhere, contract prices are rising sharply with Asian customers paying significantly more for barrels from Middle East sources as they seek to replace their normal supplies of Iranian crude. Basrah Light, for example, was reported as offered at its highest level for nearly eight years.

The IEA is reassured to see that the challenges posed by the supply uncertainties are being managed and we hope that major players will continue to work to ensure market stability.

Demand

Summary

This month, 2018 global oil demand growth estimates have been revised down by 70 kb/d to 1.2 mb/d and the 2019 forecast by 90 kb/d to 1.3 mb/d. The changes reflect lower-than-expected 2018 data in large consuming nations such as Egypt, India, Indonesia and Nigeria. Also, early 2019 data for Brazil, China and Japan were below our earlier estimates. The bulk of the adjustments occurred in non-OECD countries; however, it is hard to find a common thread. In Brazil, China and Nigeria, a recent economic deceleration appears to be responsible. In Egypt, fuel switching to natural gas in the power sector reduced fuel oil requirements. OECD Asia oil demand was also revised down in 1Q19, as a warmer-than-usual winter season dampened demand for kerosene. For individual products, gasoline and gasoil/diesel, both predominantly transport fuels, saw the largest decreases in our growth expectations.



The full picture for 1Q19 is not yet available, however so far data point to lower-than-expected demand. Growth in 1Q19 was 640 kb/d y-o-y, down from last month's forecast of 1 mb/d. However, the total figure hides different realities between OECD and non-OECD countries. Oil demand in non-OECD countries increased 930 kb/d y-o-y, contributed by China, India and Russia. In the OECD, it fell by a significant 300 kb/d, the second straight quarterly decrease. Within the OECD, Europe and Asia Oceania saw demand fall whereas in the Americas the continuing dynamism of the petrochemical industry bolstered oil consumption.



While early 2019 data has led us to revise our annual oil demand growth forecast to 1.3 mb/d, the pace is likely to pick up significantly during the rest of the year. In other words, 1Q19 will end up being a tough quarter rather than the start of a new trend. Non-OECD countries will continue to drive overall oil demand in 2019 and be responsible for 1.1 mb/d of growth. In the OECD, there will be growth of 210 kb/d principally supported by the Americas. Oil demand is expected to average 100.4 mb/d overall, the first time it reaches the 100 mb/d level on an annual basis.



Supply

Summary

Global oil supply fell 300 kb/d to 99.3 mb/d in April, led by losses in Canada, Kazakhstan, Azerbaijan and Iran. The month-on-month (m-o-m) decline was tempered by solid gains in Brazil, the US, Libya and Nigeria. As for OPEC, higher flows from Nigeria and Libya more than offset a hefty decrease from Iran, lifting crude production by 60 kb/d to 30.2 mb/d. Non-OPEC oil supply fell 360 kb/d m-o-m to 63.6 mb/d. Compared to a year ago, global oil production was up 775 kb/d. Fuelled by the US, non-OPEC supply was up 1.95 mb/d while OPEC supply was down 1.2 mb/d.



Following a decline in non-OPEC output in 1Q19 of more than 0.5 mb/d, in the second quarter heavy maintenance and continued production management is expected to keep supply well below 4Q18's record high. Kazakhstan's output likely fell further in May, while North Sea production will decline sharply in June as seasonal maintenance gets underway. Russian production is thought to have eased as compliance with agreed output cuts improved and as some output was curtailed due to contamination along the Druzbha pipeline. Growth in non-OPEC production in 2Q19 slows to 1.8 mb/d year-on-year (y-o-y) from 2.6 mb/d in 1Q19 and an even higher rate of 3.4 mb/d during 2H18.

While non-OPEC supply is expected to rebound from 2Q19 onwards, the pace of growth will ease further. A slowdown in drilling, lower capital allocations and faster base declines underpin our weaker growth projections for the US. Expansions in Canada, which averaged nearly 400 kb/d last year, have stalled and further declines are expected in the North Sea. Losses in Mexico show signs of easing and could be reversed in China following a massive boost in upstream spending. Brazil's output is set to rebound but expected growth has been revised lower following heavy outages at the start of the year and delays to the ramp-up of new units.

For the year as a whole, the pace of non-OPEC growth slows to 1.9 mb/d from 2.8 mb/d in 2018. This deceleration coupled with robust enforcement of the 1.2 mb/d production cut agreed by OPEC, Russia and nine other non-OPEC countries (OPEC+) will, in time, reverse the significant stock builds that were seen in 2018. In April, output from the OPEC+ countries was 440 kb/d below their 44.3 mb/d target, boosting compliance to 137%. The stronger performance was thanks to deeper cuts from Kazakhstan, Azerbaijan and Russia that raised non-OPEC compliance to 151%. OPEC's compliance rate was 131% as Saudi Arabia produced far below its supply target.

Looking ahead, with Iranian output set to fall following the cancellation by the US of waivers for Iran's customers, and the call on OPEC crude rising, there is scope for other producers to raise supply. The call on OPEC crude increases to 30.9 mb/d in 2Q19, roughly 700 kb/d more than was produced in April. The call then fall backs to 30.2 mb/d during the second half of the year on higher non-OPEC output. While Saudi Arabia has signalled its readiness to supply more oil should customers request it, the kingdom remains committed to its 10.3 mb/d supply target. OPEC+ is due to decide whether to extend supply cuts on 25-26 June.

In the meantime, the OPEC+ deal, US sanctions against Iran and Venezuela and Alberta's output cuts have significantly tightened supplies of medium-heavy oil. Compared to November, supply of these grades has fallen by nearly 3 mb/d. In May, medium-heavy output could fall further as Iran's exports decline after waivers end. As tension rises in the Middle East, the UAE said that on 12 May four commercial vessels, including two Saudi oil tankers, were sabotaged near the emirate of Fujairah although there was no impact on exports. On 14 May, Saudi Arabia said armed drones hit two oil pumping stations, but there was no disruption to supply.



Refining

Summary

In 2Q19, global refining is seeing its third consecutive quarter of lacklustre growth. After a 0.4 mb/d year-on-year (y-o-y) decline in 4Q18, runs were only 0.4 mb/d higher y-o-y in 1Q19, and are now just above the 2Q18 level. Extended maintenance in the US and Europe and unusually low activity in OECD Asia are mostly responsible. At the same time, however, 1Q19 margins, despite a gradual increase over the quarter, were also down y-o-y. This is due to a protracted period of slow growth in refined products demand that started in 2Q18. Using our top-down method of estimating demand, 2018 refined product demand growth was about 0.4 mb/d, the lowest since 2011, although even this figure was skewed by a strong 1Q18. The average growth over the past four quarters (2Q18-1Q19) was a gloomier 150 kb/d. It is probably more than a coincidence that oil prices in 2018 increased at the steepest rate since 2011, as this could have affected demand growth.



For the rest of this year refined product demand growth is expected at about 1 mb/d on average, mostly thanks to the low base year effect. Refining activity in 2Q19 is expected to be flat y-o-y, due to increased maintenance and lower runs in regions affected by the Druzhba pipeline contamination (see Druzhba: friendship turned sour). This could result in a large draw in refined products stocks - 1.3 mb/d. Global refining throughput is set to pick up sharply from April to August, increasing by 1 mb/d a month on average. Increasing activity will replenish refined product stocks. On the other hand, crude stocks are likely to draw by as much as 2.3 mb/d in 3Q19, assuming no change in OPEC output.



Margins

After a period of synchronised movement, global refining margins diverged again in April as average crude prices increased by $4-5/bbl m-o-m. This relatively sharp increase resulted in all observed hydroskimming margins turning negative on a monthly average basis for the first time this year. In Europe, only Brent cracking margins firmed, while simple margins fell due to weaker fuel oil cracks. Northwest Europe Urals prices benefitted from medium-grade tightness in global markets, flirting with positive differentials with North Sea Dated. In late April, the Druzhba pipeline problem offered further support. This pushed Northwest Europe Urals cracking margins below Brent in a rare occurrence. In Singapore, stronger gasoline cracks could not offset lower fuel oil and middle distillates cracks. The US hubs, again, defied the global trend and margins increased. Even sour margins were stronger m-o-m, supported by tight product markets due to unusually underwhelming refining activity in recent months. The US Midwest, with its own microclimate of cheaper crude and higher product prices, saw most refining margins crossing the symbolic $20/bbl mark, quadrupling since the start of the year.



Stocks

Summary

OECD commercial stocks fell 25.8 mb month on month (m-o-m) in March to 2 849 mb, the second straight monthly decrease. The fall was larger than the typical five-year average reduction of 4 mb. Total stocks were 2.2 mb below the five-year average at end-month. Stocks in days of forward demand declined to 59.8 days, the lowest since July 2018.

Crude stocks fell counter-seasonally by 6.3 mb to 1 105 mb, with draws recorded in the OECD Americas and the OECD Asia Oceania. The OECD Europe showed lower-than-usual builds, possibly as a result of supply cuts by the OPEC+ agreement. NGL and feedstock holdings built 0.8 mb to 333 mb and remained close to an historical high. Oil product inventories fell by 20.3 mb to 1 411 mb in line with the five-year average decline of 25.6 mb. Middle distillates fell only by 1.8 mb compared with the five-year average of 10.8 mb, due to relatively high temperatures in the northern hemisphere and slower global trade activity in early 2019. Motor gasoline stocks fell by 20.3 mb to 389 mb. Fuel oil and other products gained 1.1 mb and 0.7 mb, respectively.



Preliminary data for April are mixed: some stock builds were observed in the US and Japan, while inventories fell in Europe. US stockpiles rose by 24.7 mb due to higher crude imports and oil products inventory builds. Japanese preliminary data showed a 4.1 mb increase in total stocks, attributable to crude oil and feedstocks. European stocks, by contrast, decreased by 5.8 mb owing to steep draws in motor gasoline (-3.6 mb) and middle distillates (-2.9 mb).

During 1Q19, OECD industry stocks decreased by 22.5 mb (250 kb/d). OECD Americas contributed most to this decrease with a fall of 45.8 mb, mainly due to high crude exports at 2.7 mb/d on average and lower crude imports of around 7 mb/d. Outside the OECD countries, crude stocks were largely unchanged according to the figures available from JODI (up until February) for 11 non-OECD countries excluding China. The implied crude stocks build in China was about 70 mb, which has a significant impact on total global oil balances. Seaborne oil in transit in 1Q19 fell significantly by 50.4 mb versus 4Q18, compared with an increase of 67.9 mb in 4Q18 vs 3Q18. The main reason is the implementation of the OPEC+ agreement and lower exports from Iran and Venezuela.



For January, stocks were revised down in all OECD regions. For February, total OECD data were revised up by 3.8 mb. Upward revisions were seen in Europe and Asia Oceania, whereas in the Americas the number was reduced.



Prices

Market overview

Benchmark crude oil prices rose to five-month highs in late April, following the news that sanctions waivers granted to some buyers of Iranian crude would not be renewed. On 25 April, flows of Urals along the Druzhba pipeline to Eastern and Central Europe were halted due to contamination. This exacerbated tightness in sour crude markets. Despite this and other news, such as the declaration of force majeure in Nigeria, civil unrest in Libya and Algeria, and sharply lower North Sea supplies this summer, higher prices were short-lived. Since 24 April, Brent and WTI have declined by 6% and 7%, respectively, as supply fears eased on higher US output and oil demand growth is threatened by heightened trade tensions. Gasoline cracks strengthened as supplies appear tight ahead of the peak US demand season. However, cracks of other refined products were squeezed by higher crude prices and abundant Chinese exports.