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: 14 June 2019
- Our estimate for global oil demand growth in 2019 has been cut for a second consecutive month. It is now projected at 1.2 mb/d. In 1Q19, global growth was only 0.3 mb/d, and for 2Q19 the estimate is 1.2 mb/d. We expect higher growth in 2H19 at 1.6 mb/d.
- In 2020, global oil demand growth will rise to 1.4 mb/d, supported by solid non-OECD demand and petrochemicals expansion. The IMO switch will result in major changes to bunker fuel demand, sharply increasing gasoil demand from 4Q19.
- Non-OPEC supply growth will accelerate from 1.9 mb/d this year to 2.3 mb/d in 2020. The US leads the gains, but solid growth also comes from Brazil and Norway. In May, global oil supply eased by 0.1 mb/d to 99.5 mb/d, down 2.8 mb/d from the November peak.
- The call on OPEC crude drops to 29.3 mb/d in 2020, 650 kb/d below the May output level. OPEC supply fell to its lowest since 2014 as Iranian supply plunged due to sanctions and on lower Saudi and Nigerian output. OPEC's effective spare capacity was 3.2 mb/d.
- Global refinery throughput in May was at its lowest level in two years on maintenance and unplanned outages. By August, refinery runs could be more than 4 mb/d higher. In 2019-20, the global refining industry will add 3.5 mb/d of new capacity.
- OECD oil stocks rose by 15.8 mb in April to 2 883 mb, and are slightly above the five-year average. In days of forward demand, stocks amount to 59.9 days, 1.6 days below the average. Preliminary data for May show a significant build in US crude stocks.
- Benchmark crude futures prices have fallen by 20% since late April partly due to concerns about the health of oil demand. However, the Brent forward curve remains in backwardation suggesting tight prompt markets. Gasoline cracks were pressured by abundant supplies.
In this Report, we publish our first outlook for 2020. As we do so, volatility has returned to oil markets with a dramatic sell-off in late May seeing Brent prices fall from $70/bbl to $60/bbl. Until recently, the focus has been on the supply side with the familiar list of uncertainties - Iran, Venezuela, Libya, and the Vienna Agreement - lifting Brent prices above $70/bbl in early April and keeping them there until late May. Not that supply concerns have gone away: yesterday oil prices initially increased by 4% on news of the attacks on two tankers in the Gulf of Oman, before easing back slightly.
Now, the main focus is on oil demand as economic sentiment weakens. In May, the OECD published an outlook for global GDP growth for 2019 of 3.2%, lower than our previous assumption. World trade growth has fallen back to its slowest pace since the financial crisis ten years ago, according to data from the Netherlands Bureau of Economic Policy Analysis and various purchasing managers' indices.
The consequences for oil demand are becoming apparent. In 1Q19, growth was only 0.3 mb/d versus a very strong 1Q18, the lowest for any quarter since 4Q11. The main weakness was in OECD countries where demand fell by a significant 0.6 mb/d, spread across all regions. There were various factors: a warm winter in Japan, a slowdown in the petrochemicals industry in Europe, and tepid gasoline and diesel demand in the United States, with the worsening trade outlook a common theme across all regions. In contrast, the non-OECD world saw demand rise by 0.9 mb/d, although recent data for China suggest that growth in April was a lacklustre 0.2 mb/d. In 2Q19, we see global demand growth 0.1 mb/d lower than in last month's Report. For now though, there is optimism that the latter part of this year and next year will see an improved economic picture. The OECD sees global GDP growth rebounding to 3.4% in 2020, assuming that trade disputes are resolved and confidence rebuilds. This suggests that global oil demand growth will have scope to recover from 1.2 mb/d in 2019 to 1.4 mb/d in 2020.
Meeting the expected demand growth is unlikely to be a problem. Plentiful supply will be available from non-OPEC countries. The US will contribute 90% of this year's 1.9 mb/d increase in supply and in 2020 non-OPEC growth will be significantly higher at 2.3 mb/d with US gains supported by important contributions from Brazil, Canada, and Norway. Later this month, Vienna Agreement oil ministers, faced with short-term uncertainty over the strength of demand and relentless supply growth from their competitors, are due to discuss the fate of their output deal. Ministers will note that OECD oil stocks remain at comfortable levels 16 mb above the five-year average. However, they will also note that although in 1Q19 weak demand helped create a surplus of 1.1 mb/d, in 2Q19 the market is in deficit by an estimated 0.4 mb/d, with the backwardated price structure reflecting tighter markets. This deficit is partly due to the fact that in May the Vienna Agreement countries cut output by 0.5 mb/d in excess of their committed 1.2 mb/d. In 3Q19, the market could receive further support from an expected pick-up in refining activity. Recently, high levels of maintenance in the US and Europe, low runs in Japan and Korea, and fallout from the Druzhba pipeline contamination contributed to weak growth in global refining throughput. This could be about to change: according to our estimates, crude runs in August could be about 4 mb/d higher than in May. This might cause greater tightness in crude markets, particularly for sour barrels if the Vienna Agreement is extended and there is no change in the situations in Iran and Venezuela. Of course, much depends on the strength of oil demand later in the year.
A clear message from our first look at 2020 is that there is plenty of non-OPEC supply growth available to meet any likely level of demand, assuming no major geopolitical shock, and the OPEC countries are sitting on 3.2 mb/d of spare capacity. This is welcome news for consumers and the wider health of the currently vulnerable global economy, as it will limit significant upward pressure on oil prices. However, this must be viewed against the needs of producers particularly with regard to investment in the new capacity that will be needed in the medium term.
For the second consecutive month, we have revised down our 2019 oil demand growth forecast, this time by 100 kb/d, to 1.2 mb/d. The bulk of the revision is in the OECD. We received lower March consumption statistics for the Americas, which drove our overall OECD 1Q19 growth estimate down by 360 kb/d versus last month's Report. Global oil demand is now estimated to have risen by just 250 kb/d year-on-year (y-o-y) in 1Q19, the lowest annual growth registered since 4Q11, when the price of Brent crude oil averaged $109/bbl. Oil consumption fell in the OECD by 600 kb/d y-o-y and rose in non-OECD countries by 850 kb/d. A global economic slowdown, lower growth in the petrochemical industry and warmer than normal weather in the northern hemisphere were contributory factors. One should also bear in mind that annual growth in 1Q18 amounted to a significant 1.9 mb/d. This also contributed to low growth on a y-o-y basis.
This month, we have also revised down our 2Q19 growth estimates by 300 kb/d. China's April oil demand was 230 kb/d less than expected, owing to significant downgrades for diesel and LPG. However, these lower global estimates for 1Q19 and 2Q19 are partly offset by higher forecasts for 3Q19 (+200 kb/d) and 4Q19 (+80 kb/d) driven by lower oil prices and an expected rebound in petrochemical demand. We have also incorporated a new gross domestic product (GDP) forecast published by the OECD in May.
As for 2020, oil demand is expected to accelerate to 1.4 mb/d. Non-OECD countries will be the main drivers (+880 kb/d y-o-y), although the OECD will also contribute a significant 520 kb/d, helped by petrochemical cracker plant additions in the US and higher economic growth. On a fuel-by-fuel basis, diesel/gasoil will see solid expansion, as new rules implemented by the International Maritime Organisation (IMO) force ship operators to switch away from high sulphur fuel oil, the use of which will decline significantly (See IMO rules to boost gasoil demand from 4Q19 onwards).
IMO rules to boost gasoil demand from 4Q19 onwards
New regulations on sulphur in bunker fuel implemented by the IMO at the start of 2020 are likely to boost gasoil demand from the end of 2019 onwards, as shippers begin to restrict heavy fuel oil use in preparation for the switch. In these forecasts, we incorporated the switch expected within the bunker pool in 2020. We start the switch from high sulphur fuel oil (HSFO) to marine gasoil (MGO) and very low sulphur fuel oil (VLSFO) in 4Q19. Note that, in this Report, MGO is included in gasoil and VLSFO in fuel oil.
Our overall outlook, and the rationale behind our forecasts, remains broadly unchanged from that published in March in Oil 2019 - Analysis and Forecast to 2024 (see Special Feature - IMO 2020: Calm after the storm). In the OECD, where Emission Control Areas (ECA) limiting sulphur emissions in bunker fuel already exist in many countries, we expect around 30% of HSFO usage to switch to gasoil in 4Q19, increasing to 40% in 2020. HSFO consumption in 4Q19 is likely to be responsible for a little under two-thirds of total bunker fuel demand globally. However, demand will likely fall precipitously in 2020, more so in the OECD due to gasoil and VLSFO fuel availability superior to that in non-OECD countries.
Altogether, we expect gasoil demand in the marine sector to rise around 200 kb/d y-o-y in 2019 and 900 kb/d in 2020. HSFO consumption will decline 300 kb/d y-o-y in 2019 and by a more significant 1.6 mb/d in 2020. Finally, VLSFO demand will increase from near zero in 2018 to 150 kb/d in 2019 and 1 mb/d in 2020.
Some of the trends we highlighted in Oil 2019 - Analysis and Forecast to 2024 remain unchanged: gasoil prices are likely to increase, in turn slowing oil demand growth from onshore gasoil and diesel users, while overall bunker fuel demand will barely grow. Some vessels will be non-compliant with the IMO rules due to lack of fuel availability.
Stronger non-OPEC supply growth of 2.3 mb/d in 2020 - up from 1.9 mb/d this year - means the tightening of oil markets could prove short lived. The anticipated gains are such that even with higher demand growth versus 2019, the requirement for OPEC crude could drop to 29.3 mb/d in 2020, 650 kb/d below the group's production in May. In the near-term, global oil stock draws could be limited to 2Q19 and 3Q19, if OPEC output stays at around current levels.
It is not as if OPEC has been pumping flat out. OPEC, Russia and nine other non-OPEC countries (OPEC+) have more than delivered on their 1.2 mb/d supply cut in the hopes of reversing the substantial stock builds of 2018. Output from the OPEC+ countries during May was 530 kb/d below their 44.3 mb/d target, which delivered compliance of 145%.
The over-performance is mainly from Saudi Arabia and Russia. Saudi Arabia led OPEC's compliance rate to 133% while the fallout from the Druzhba pipeline contamination saw Russia's output fall by 120 kb/d. OPEC+ is due to review its agreement at a meeting scheduled for 25-26 June in Vienna. Saudi Arabia has signalled that the curbs should be prolonged to avoid a market share battle with the US or a repeat of oil's collapse of five years ago.
The 2 mb/d reduction in OPEC+ supply since November's high, along with a combined loss of more than 1 mb/d from Iran and Venezuela, has helped clear the supply overhang. It has also left the producers with roughly 3.5 mb/d of spare capacity, 3.2 mb/d of which is held in OPEC. This is a useful insurance should Iranian and Venezuelan supplies fall further or in case of supply disruptions elsewhere. Output in Nigeria and Libya remains vulnerable due to ongoing civil unrest.
During May, global oil supply edged down 100 kb/d to 99.5 mb/d, nearly 3 mb/d below a November peak. The month-on-month (m-o-m) loss - led by Canada, Iran, Russia and Saudi Arabia - was mostly offset by higher supply from Brazil, the US, Iraq and biofuels. As for OPEC, plunging Iranian production and lower Saudi and Nigerian output cut crude supply by 230 kb/d to just under 30 mb/d, a five-year low. Non-OPEC supply rose 130 kb/d to 64 mb/d. Compared to a year ago, global oil supply was 620 kb/d higher. Driven by the US, non-OPEC output was up 2.1 mb/d, while OPEC was down 1.5 mb/d.
While supply growth in the US is forecast to slow to 1.3 mb/d in 2020 from 1.7 mb/d this year, expansions in other non-OPEC countries are set to accelerate. Norway is expected to show growth of 290 kb/d after declining by 130 kb/d this year and Brazil is projected to ramp up by a further 330 kb/d following a 240 kb/d increase this year. Canada and Russia will also post gains assuming production restraints are lifted.
Global refining throughput in May was just 80.4 mb/d, down 0.9 mb/d month-on-month (m-o-m) and 0.8 mb/d year-on-year (y-o-y). This is the lowest level since March 2017. Unplanned outages in Europe and the US Midwest augmented an already high maintenance season globally. In 2Q19, runs are expected to decline 0.1 mb/d y-o-y.
With global refining activity growing every year, seasonal variations also increase in amplitude. This year, we expect a 4.2 mb/d swing between the lowest and highest months, May and August, up from last year's seasonal gain of 3.3 mb/d. This seasonal ramp-up is concentrated in the Western Hemisphere: refinery runs in the Atlantic Basin, led by the US and Europe, will increase by 0.9 mb/d on a monthly basis. Looking further ahead into 2020, we expect throughput growth for the year to be double this year's modest rise of 0.5 mb/d (see What does 2020 hold in store for refiners?) as 3.5 mb/d of new capacity comes online over 2019-20.
What does 2020 hold in store for refiners?
We have made several changes to the refining capacity estimates published in March in Oil 2019 - Analysis and Forecast to 2024. Nominal additions in 2019 are now forecast to be 2.4 mb/d, 0.3 mb/d lower than previously estimated, while 2020 additions are 1.1 mb/d, or 0.6 mb/d higher. The changes are mainly due to moving a large Chinese project (Zhejiang Petrochemical) to 2020 and including two additional independent refinery units in China. In our forecast, capacity additions over 2019 and 2020 total 3.5 mb/d.
Assigning capacity additions to specific months or quarters is difficult, as intended start dates are not always met and refineries tend to ramp up over several months. Rolling averages over four quarters are therefore a better indicator of capacity growth. In 2019-20, additions nominally peak in 4Q19 at 1.4 mb/d. Using the rolling average method not only smooths this quarterly peak but also shifts the bulk of the additions to 2020.
In any case, we take only limited guidance from capacity additions in forecasting refining throughput. While individual countries' refinery intake may increase with new capacity coming online, global activity levels will still depend on market demand for refined products. Over 2019 and 2020, refined product demand growth is forecast to total 1.6 mb/d, making room for only half the capacity additions. The rest will have to compete with existing refineries, as global oil market trends are unlikely to incentivise large product stock builds.
Next year sees the implementation by the International Maritime Organisation of new bunker fuel emission standards. As a result, diesel demand growth jumps to 1.2 mb/d. About 1 mb/d of incremental diesel output is forecast to be available from a combination of new refinery output and yield switches, along with biodiesel and other non-petroleum based supply. This means that diesel markets in 2020 may be in deficit by 200 kb/d. The tightness will take time to materialise. In 1Q20, the market will be generally adequately supplied, as onshore diesel demand typically falls by 1 mb/d from 4Q19. In 2Q20, seasonal demand growth and refinery maintenance may result in gasoil stocks drawing by close to 1 mb/d, easing only in the last quarter of the year. Our first forecast for refining activity in 2020 sees annual growth of 1.1 mb/d versus growth in refined product demand of 0.9 mb/d.
The IMO specification change will also result in the sharpest reduction of allowed sulphur content in refined products, increasing hydrogen demand for refiners. IEA's recently released hydrogen report sheds light on its current and potential uses (see The Future of Hydrogen).
In May, crude prices declined modestly in monthly average terms, by around $1.3/bbl, but refining margins increased only in regions with unexpectedly high unplanned outages such as parts of Europe and the US Midwest. Product cracks moved in a particularly uncoordinated fashion, with naphtha suffering from low petrochemical demand, fuel oil strengthening on lower crude prices and gasoline and middle distillates cracks diverging regionally.
The recent sharp decline in crude prices started in earnest in the last week of May, which helped US and Singapore margins gain week-on-week. Despite the somewhat underwhelming performance in May, in the last two months margins have generally increased from 1Q19 levels, reflecting exceptionally high outages and some of the weakest refining activity levels observed in the last two years.
OECD industry stocks rose by 15.8 mb month-on-month (m-o-m) in April to 2 883 mb and now stand at almost the same level as at the beginning of 2019. The gain was in line with the five-year average of 15.2 mb for the month. Total stocks remain 16.3 mb above the five-year average, but on a forward demand basis, they are below it, by 1.6 days, at 59.9 days.
Crude stocks increased 12.8 mb in April, significantly more than the usual build of 0.3 mb, to reach 1 134 mb, the highest level since November 2017. The OECD Americas region led the builds by adding 16.8 mb due to lower US crude exports and refinery throughputs while crude inventories in OECD Europe and Asia Oceania drew by 1.4 mb and 2.7 mb, respectively. Stocks of oil products fell by 7 mb in contrast to the five-year average builds of 8.1 mb for the month. Gasoline inventories declined by 12.9 mb in total with all three regions showing larger than the average decreases. Middle distillates declined by 10.2 mb compared with a normal increase of 3.9 mb. Other products, however, increased by 17.9 mb, twice as much as usual owing to large builds in the OECD Americas.
Preliminary data for May are mixed: inventory builds were seen in the US and Japan, while stocks fell in Europe. US total oil inventories increased by a very significant 51.1 mb, or 1.6 mb/d. This is because of a counter-seasonal crude stocks increase of 13.8 mb linked to higher crude oil imports and larger than normal builds in oil products driven by higher m-o-m refinery runs. Japanese preliminary data also indicate stock builds of 8.8 mb as a whole. European stocks, on the other hand, decreased by 1.5 mb in total. A decrease of 7.6 mb product inventories due to lower refinery throughput offset 6.1 mb crude stock builds.
March OECD figures were revised up and so we have amended our 1Q19 stock changes in this Report. OECD commercial stocks decreased by 2.5 mb in 1Q19, mainly due to draws in the OECD Americas amid high crude exports. Outside the OECD, crude and NGL stocks for 15 countries reporting their figures to JODI increased 13.3 mb while oil products inventories showed a 30.2 mb decrease. Seaborne oil in transit volume changes in 1Q19 fell by 30 mb according to the latest available data from Refinitiv. The implied crude stock builds in China, Fujairah and Singapore were unchanged. The revised data implies a global stock build of 30.4 mb (340 kb/d) in 1Q19, which is 14.6 mb higher than our previous estimate.
OECD stocks were revised up by 17.9 mb in March. The biggest adjustment was in the OECD Americas, particularly in the US, where crude stocks increased by 7.9 mb. Middle distillates and gasoline inventories were also revised up. February stock figures were also changed, in this case down by 1 mb.
Benchmark crude oil prices have been on a downward trend since hitting five-month highs in late April. In May, ICE Brent and NYMEX WTI declined by $1.33/bbl and $3.00/bbl, respectively, despite supply concerns and geopolitical tensions. Market sentiment is more focused on the risk of a slowdown in the global economy and trade. Furthermore, while outages in the North Sea have hampered supplies, market participants are comforted by growing US production, ample OPEC spare capacity and progress in resolving the problems arising from the contamination of Urals flowing through the Druzhba pipeline system. In the last week of May, Brent and WTI plunged to their lowest levels since January and are down by 20% from the April peak.