Oil Market Report - October 2019

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.

  • Global oil supply plunged 1.5 mb/d in September to 99.3 mb/d after attacks on Saudi oil facilities briefly shut in more than half the kingdom’s production. Even with a swift recovery and steady supply from the rest of OPEC, stock draws are likely in 4Q19. A different picture emerges for 2020, when non-OPEC supply growth, led by the US, Brazil and Norway, accelerates from 1.8 mb/d to 2.2 mb/d, reducing the call on OPEC to 29 mb/d.
  • Global oil demand recovered from earlier low levels, rising o.8 mb/d year-on-year in July and 1.4 mb/d in August. Growth is expected to quicken to 1.6 mb/d in 2H19, benefitting from a lower base in 2018 and oil prices currently 30% lower y-o-y. Our demand growth forecasts for 2019 and 2010 are both reduced by 0.1 mb/d, to 1 mb/d and 1.2 mb/d, respectively. For 2019 this reflects changes to 2018 data and for 2020 it reflects a lower GDP outlook.
  • In 3Q19, global refining throughput continued the recent pattern of decline, falling by 0.5 mb/d y o-y, and reducing our annual growth forecast to just 150 kb/d. This is the lowest in ten years. Our refined product balances imply a counter-seasonal draw in 3Q19, as demand is estimated to have picked up after five consecutive quarters of almost no growth. In 2020, throughput increases by 1.2 mb/d.
  • OECD industry stocks increased by 20.8 mb in August to 2 974 mb and stood 43.1 mb above the five-year average. Stocks in terms of days of forward demand rose by 0.6 days to 61.6 days, which is 0.6 days below the average. Preliminary data for September showed stocks falling in all three OECD regions and by 21.7 mb overall. Floating storage of crude oil rose by 1.8 mb in September to 70.1 mb. The number of Iranian vessels used for storage was unchanged from the previous month.
  • On 16 September, the first day of trading after the attacks on Saudi Arabia, ICE Brent futures rose by 19% to $71.95/bbl. Following reassurances from Saudi Arabia that normal operations would resume, prices quickly eased and are currently around $2/bbl below the level immediately before the attacks. Sanctions against a Chinese shipping company tightened vessel supply and propelled freight rates to their highest in more than ten years.

Oil markets in September withstood a textbook case of a large-scale supply disruption as the attacks on Saudi Arabia temporarily affected about 5.7 mb/d of crude production capacity. On Monday 16 September, the first trading day following the attacks, after an initial spike to $71/bbl Brent prices fell back as it became clear that the damage, although serious, would not cause long-lasting disruption to markets. Saudi Aramco’s achievement in restoring operations and maintaining customer confidence was very impressive. This is reflected in the fact that as we publish this Report, the price of Brent is close to $58/bbl, actually $2/bbl below the pre-attack level.

Intuitively, the precision attacks on Saudi Arabia and the possibility of a repeat should keep the market on edge. There should be talk of a geopolitical premium on top of oil prices. For now, though, there is little sign of this with security fears having been overtaken by weaker demand growth and the prospect of a wave of new oil production coming on stream – Norway’s big Johan Sverdrup project started up this month and will reach 440 kb/d by mid-2020.

In this Report, for both 2019 and 2020 we have cut our headline oil demand growth number by 0.1 mb/d. However, the reduction for 2019 mainly reflects a technical adjustment due to new data showing higher US demand in 2018 which has depressed this year’s growth number. This year is seeing two very different halves. In 1H19, global growth was only 0.4 mb/d but in 2H19 it could be as high as 1.6 mb/d with recent data lending support to the outlook: non-OECD demand growth in July and August was 1 mb/d and 1.5 mb/d, respectively, with Chinese demand growing solidly by more than 0.5 mb/d y-o-y. The OECD countries remain in a relatively weak state, although as we move through 2H19 y-o-y growth returns helped by a comparison versus a low base in the latter part of 2018. Demand is supported by prices (Brent) that are more than 30% below year-ago levels. For 2020, a weaker GDP growth forecast has seen our oil demand outlook cut back to a still solid 1.2 mb/d.

The renewed focus on demand and supply fundamentals does not mean that the attacks on Saudi Arabia can be shrugged off as being of little consequence. Further incidents of this nature in the strategically important Gulf region could happen and cause even greater disruption. A key lesson from recent weeks is that the world has a big insurance policy in the form of stockholdings. The market is the first responder to a supply crisis and OECD commercial stocks in August increased for the fifth consecutive month and are now close to the record 3+ billion barrels level we saw during most of 2016. IEA members hold an additional 1.6 billion barrels of strategic stocks, and the prompt response by the Agency to consider an emergency stocks release helped to calm markets. Commercial and strategic inventories go a long way to offsetting the lack of spare crude production capacity outside of Saudi Arabia, limited mainly to 1 mb/d in Iraq, UAE, Kuwait and Russia. We might have quickly returned to business as usual, but security of supply remains very relevant.