Oil Market Report - June 2018

• Our demand growth estimate for 2018 has been left largely unchanged, at 1.4 mb/d. Recent data confirms strong growth in 1Q18 and in early 2Q18, partly due to colder weather in the northern hemisphere. A slowdown is expected in 2H18.
• For 2019, our first estimate of demand anticipates growth of 1.4 mb/d. A solid economic background and an assumption of more stable prices are key factors. Risks include possibly higher prices and trade disruptions. Some governments are considering measures to ease price pressures on consumers.
• Global oil supply rose 276 kb/d in May, to 98.7 mb/d, as non-OPEC output rose further to stand a hefty 2.2 mb/d above a year ago. OPEC production crept higher. Non-OPEC supply will grow by 2.0 mb/d in 2018, easing slightly to 1.7 mb/d.
• OPEC crude supply edged up 50 kb/d in May to 31.69 mb/d. Higher flows from Saudi Arabia, Iraq and Algeria offset a fall in Nigeria and further declines in Venezuela. While the call on OPEC is set to ease in 2019, potential losses from Venezuela and Iran could require others to produce more.
• OECD commercial stocks declined 3.1 mb in April to a new three-year low of 2 809 mb. Middle distillate holdings fell 7.4 mb in April and were significantly below the five-year average in the Americas and Europe ahead of the peak demand season in the northern hemisphere.
• Outright benchmark crude prices reached multi-year highs in late May but have since fallen back awaiting the outcome of the OPEC meeting. ICE Brent and NYMEX WTI futures prices are up 14% and 9%, respectively, this year.
• Estimated 2Q18 refinery runs are revised down to 80.9 mb/d, but for 3Q18 they are revised higher to 82.5 mb/d. Refined products stocks should build in 3Q18 by 0.4 mb/d after drawing by 1.2 mb/d in 2Q18. Despite Brent prices briefly touching $80/bbl, margins were generally higher m-o-m.

• Our demand growth estimate for 2018 has been left largely unchanged, at 1.4 mb/d. Recent data confirms strong growth in 1Q18 and in early 2Q18, partly due to colder weather in the northern hemisphere. A slowdown is expected in 2H18.
• For 2019, our first estimate of demand anticipates growth of 1.4 mb/d. A solid economic background and an assumption of more stable prices are key factors. Risks include possibly higher prices and trade disruptions. Some governments are considering measures to ease price pressures on consumers.
• Global oil supply rose 276 kb/d in May, to 98.7 mb/d, as non-OPEC output rose further to stand a hefty 2.2 mb/d above a year ago. OPEC production crept higher. Non-OPEC supply will grow by 2.0 mb/d in 2018, easing slightly to 1.7 mb/d.
• OPEC crude supply edged up 50 kb/d in May to 31.69 mb/d. Higher flows from Saudi Arabia, Iraq and Algeria offset a fall in Nigeria and further declines in Venezuela. While the call on OPEC is set to ease in 2019, potential losses from Venezuela and Iran could require others to produce more.
• OECD commercial stocks declined 3.1 mb in April to a new three-year low of 2 809 mb. Middle distillate holdings fell 7.4 mb in April and were significantly below the five-year average in the Americas and Europe ahead of the peak demand season in the northern hemisphere.
• Outright benchmark crude prices reached multi-year highs in late May but have since fallen back awaiting the outcome of the OPEC meeting. ICE Brent and NYMEX WTI futures prices are up 14% and 9%, respectively, this year.
• Estimated 2Q18 refinery runs are revised down to 80.9 mb/d, but for 3Q18 they are revised higher to 82.5 mb/d. Refined products stocks should build in 3Q18 by 0.4 mb/d after drawing by 1.2 mb/d in 2Q18. Despite Brent prices briefly touching $80/bbl, margins were generally higher m-o-m.

In this Report, we publish our first estimates for global oil demand and non-OPEC supply for 2019. Rapidly rising prices in recent months have raised doubts about the strength of demand growth, and we have modestly downgraded our estimate for 2018. Prices are unlikely to increase as sharply as they did from mid-2017 onwards and thus the dampening effect on demand will be reduced. Demand might also receive support from measures under consideration in some countries, e.g. Argentina, Brazil, India, Indonesia, Russia and Turkey, to help consumers cope with higher prices. When you add the boost to demand from the growing petrochemicals sector, where some projects are coming on stream earlier than previously thought, the result is global oil demand growth for 2019 of 1.4 mb/d, similar to this year's level. Of course, there are downside risks: these include the possibility of higher prices, a weakening of economic confidence, trade protectionism and a potential further strengthening of the US dollar.

As far as supply is concerned, we have revised upwards our estimate for 2018 non-OPEC production growth to 2 mb/d and in 2019 we will also see bumper growth, albeit slightly reduced, of 1.7 mb/d. The United States shows by far the biggest gain (about 75% of the total across 2018 and 2019), but recently this expansion has not been without stress. The discount for WTI versus Brent has blown out to $10/bbl, amidst signs that takeaway capacity is lagging behind output growth. In this Report, (see Supply, "West Texas pipelines: Bigger is better") we have updated our analysis of infrastructure first published in Oil 2018 - Analysis and Forecasts to 2023. We think that in Texas by end-2019 there will be a net 575 kb/d of additional pipeline capacity beyond our earlier number, albeit with most of it coming on line in the second half of the year. In the meantime, capacity will likely remain tight but production will still be able to grow strongly, by 1.3 mb/d this year and 0.9 mb/d in 2019. Our non-OPEC growth for 2019 includes a modest increase from Russia reflecting a possible contribution to compensating for lost production from Iran and Venezuela.

The issue of exports from Venezuela and Iran is likely to dominate the agenda when leading producers meet in Vienna later this month. For our part, we have looked at a scenario, not a forecast, showing that by the end of next year output from these two countries could be 1.5 mb/d lower than it is today. In Iran's case, we assume a loss of exports close to that seen in the last round of sanctions, recognising that this remains uncertain and a broader range of outcomes is possible. No judgement was made as to which countries will cut back purchases. For Venezuela, we assume no respite in the production collapse that has taken 1 mb/d off the market in the past two years.

To make up for the losses, we estimate that Middle East OPEC countries could increase production in fairly short order by about 1.1 mb/d and there could be more output from Russia on top of the increase already built into our 2019 non-OPEC supply numbers. However, even if the Iran/Venezuela supply gap is plugged, the market will be finely balanced next year, and vulnerable to prices rising higher in the event of further disruption. It is possible that the very small number of countries with spare capacity beyond what can be activated quickly will have to go the extra mile.

Statements by several parties suggest that action in terms of higher supply could be on the way. In the meantime, the IEA is monitoring the market situation closely, and, as ever, stands ready to advise its member governments on any action that might be necessary. It is also in regular dialogue with emerging importing countries. We support all efforts to minimise supply disruptions that, as history shows us, are not in the interests of either producers or consumers.

In this Report, we publish our first estimates for global oil demand and non-OPEC supply for 2019. Rapidly rising prices in recent months have raised doubts about the strength of demand growth, and we have modestly downgraded our estimate for 2018. Prices are unlikely to increase as sharply as they did from mid-2017 onwards and thus the dampening effect on demand will be reduced. Demand might also receive support from measures under consideration in some countries, e.g. Argentina, Brazil, India, Indonesia, Russia and Turkey, to help consumers cope with higher prices. When you add the boost to demand from the growing petrochemicals sector, where some projects are coming on stream earlier than previously thought, the result is global oil demand growth for 2019 of 1.4 mb/d, similar to this year's level. Of course, there are downside risks: these include the possibility of higher prices, a weakening of economic confidence, trade protectionism and a potential further strengthening of the US dollar.

As far as supply is concerned, we have revised upwards our estimate for 2018 non-OPEC production growth to 2 mb/d and in 2019 we will also see bumper growth, albeit slightly reduced, of 1.7 mb/d. The United States shows by far the biggest gain (about 75% of the total across 2018 and 2019), but recently this expansion has not been without stress. The discount for WTI versus Brent has blown out to $10/bbl, amidst signs that takeaway capacity is lagging behind output growth. In this Report, (see Supply, "West Texas pipelines: Bigger is better") we have updated our analysis of infrastructure first published in Oil 2018 - Analysis and Forecasts to 2023. We think that in Texas by end-2019 there will be a net 575 kb/d of additional pipeline capacity beyond our earlier number, albeit with most of it coming on line in the second half of the year. In the meantime, capacity will likely remain tight but production will still be able to grow strongly, by 1.3 mb/d this year and 0.9 mb/d in 2019. Our non-OPEC growth for 2019 includes a modest increase from Russia reflecting a possible contribution to compensating for lost production from Iran and Venezuela.

The issue of exports from Venezuela and Iran is likely to dominate the agenda when leading producers meet in Vienna later this month. For our part, we have looked at a scenario, not a forecast, showing that by the end of next year output from these two countries could be 1.5 mb/d lower than it is today. In Iran's case, we assume a loss of exports close to that seen in the last round of sanctions, recognising that this remains uncertain and a broader range of outcomes is possible. No judgement was made as to which countries will cut back purchases. For Venezuela, we assume no respite in the production collapse that has taken 1 mb/d off the market in the past two years.

To make up for the losses, we estimate that Middle East OPEC countries could increase production in fairly short order by about 1.1 mb/d and there could be more output from Russia on top of the increase already built into our 2019 non-OPEC supply numbers. However, even if the Iran/Venezuela supply gap is plugged, the market will be finely balanced next year, and vulnerable to prices rising higher in the event of further disruption. It is possible that the very small number of countries with spare capacity beyond what can be activated quickly will have to go the extra mile.

Statements by several parties suggest that action in terms of higher supply could be on the way. In the meantime, the IEA is monitoring the market situation closely, and, as ever, stands ready to advise its member governments on any action that might be necessary. It is also in regular dialogue with emerging importing countries. We support all efforts to minimise supply disruptions that, as history shows us, are not in the interests of either producers or consumers.