Oil Market Report - March 2018

• Demand is expected to increase by 1.5 mb/d in 2018 to 99.3 mb/d, a 0.1 mb/d upward revision compared to last month's forecast. Global oil demand is estimated at 97.8 mb/d in 2017, unchanged from last month.
• Strong early data contributed to an upward revision of 240 kb/d in our outlook for OECD growth in 2018. The switch to natural gas in Pakistan and Iraq's power sectors is responsible for a downward revision of 150 kb/d to non-OECD demand.
• Global oil supply in February eased to 97.9 mb/d and was up by 0.7 mb/d on a year earlier due to higher non-OPEC output. Strong growth in the US is expected to boost this year's non-OPEC expansion to 1.8 mb/d compared to 760 kb/d in 2017.
• OPEC crude oil production edged lower in February to 32.1 mb/d, led by losses in Venezuela and the UAE. The call on OPEC crude rises steadily to 32.6 mb/d in 2H18, 480 kb/d higher than current output.
• OECD commercial stocks rose in January for the first time in seven months to reach 2 871 mb. However, the 18 mb increase was only half the usual level. The surplus to the five-year averaged fell to 53 mb. Cushing crude stocks reached their lowest level in three years.
• Global crude oil prices fell in the first half of February, before stabilising later in the month. The ICE Brent futures curve remains in backwardation. However, spreads are narrowing. Brent prices have averaged close to $67/bbl this year.
• Global refining throughput in 1Q18 slowed from 4Q17's record levels by 0.9 mb/d. It will ramp up to a new record in 2Q18 at 81.8 mb/d. We assume refining throughput will only partially meet the seasonal demand increase, with inventories filling the gap.

• Demand is expected to increase by 1.5 mb/d in 2018 to 99.3 mb/d, a 0.1 mb/d upward revision compared to last month's forecast. Global oil demand is estimated at 97.8 mb/d in 2017, unchanged from last month.
• Strong early data contributed to an upward revision of 240 kb/d in our outlook for OECD growth in 2018. The switch to natural gas in Pakistan and Iraq's power sectors is responsible for a downward revision of 150 kb/d to non-OECD demand.
• Global oil supply in February eased to 97.9 mb/d and was up by 0.7 mb/d on a year earlier due to higher non-OPEC output. Strong growth in the US is expected to boost this year's non-OPEC expansion to 1.8 mb/d compared to 760 kb/d in 2017.
• OPEC crude oil production edged lower in February to 32.1 mb/d, led by losses in Venezuela and the UAE. The call on OPEC crude rises steadily to 32.6 mb/d in 2H18, 480 kb/d higher than current output.
• OECD commercial stocks rose in January for the first time in seven months to reach 2 871 mb. However, the 18 mb increase was only half the usual level. The surplus to the five-year averaged fell to 53 mb. Cushing crude stocks reached their lowest level in three years.
• Global crude oil prices fell in the first half of February, before stabilising later in the month. The ICE Brent futures curve remains in backwardation. However, spreads are narrowing. Brent prices have averaged close to $67/bbl this year.
• Global refining throughput in 1Q18 slowed from 4Q17's record levels by 0.9 mb/d. It will ramp up to a new record in 2Q18 at 81.8 mb/d. We assume refining throughput will only partially meet the seasonal demand increase, with inventories filling the gap.

The past month has been relatively uneventful in terms of data changes, apart from an increase to our demand growth estimate. Crude oil prices are slightly lower than last month, and have generally been relatively stable for several weeks. Even so, the value of Brent crude oil is still averaging close to $67/bbl in 2018, which is about 20% higher than in the early part of last year.

Looking at demand, our estimate for global growth in 2018 has increased by 90 kb/d taking it up to 1.5 mb/d. Although this is a modest revision, it is interesting that provisional data suggests very strong starts to the year in China and India, which, taken together, accounted for nearly 50% of global demand growth in 2017. Cold weather in some parts of the northern hemisphere in January-February saw an increase in heating demand.

On supply, new and revised data shows very little change in the outlook versus last month. Although US production was lower than expected in December, there is no change to our overall 2017 number neither to our outlook for 2018 that expects crude output there to grow by 1.3 mb/d. We retain our view that total non-OPEC production grew by 760 kb/d last year and that it will surge by 1.78 mb/d this year. Within the OPEC countries, the biggest risk factor is, and will likely remain, Venezuela. Our estimate for February shows output down again, by 60 kb/d. Other countries with a risk factor include Libya, and, to a lesser extent, Nigeria. In Libya, we saw another modest supply gain in February to 1.02 mb/d and, although stability cannot be taken for granted, it appears that the frequency and severity of production interruptions is declining and higher rates of output are being maintained. Taking OPEC as a whole, quota compliance in February was 147%, but even if Venezuela's production were at its allocated level, the group's compliance would still be close to 100%.

Stocks, and specifically OECD stocks, remain the most-cited indicator of oil market re-balancing. In this Report, we note that in January they increased month-on-month for the first time since July. However, the increase of 18 mb was half the average level for January seen in the past five years. Indeed, the surplus of total OECD stocks against the five-year average fell for the ninth successive month to 50 mb, with products showing a very small deficit.

In the meantime, market re-balancing is clearly moving ahead with key indicators - supply and demand becoming more closely aligned, OECD stocks falling close to average levels, the forward price curve in backwardation at prices that increasingly appear to be sustainable - pointing in that direction. In our chart, we assume for scenario purposes that OPEC production remains flat for the rest of 2018, and on this basis there will be a very small stock build in 1Q18 with deficits in the rest of the year. With supply from Venezuela clearly vulnerable to an accelerated decline, without any compensatory change from other producers it is possible that the Latin American country could be the final element that tips the market decisively into deficit.

Moving further into the future than is usual in this Report, in the IEA's five-year outlook, published in Oil 2018 - Analysis and Forecasts to 2023, we highlighted how in 2017 discoveries of new resources fell to a record low of only 4 bn barrels while 36 bn barrels were actually produced. We also pointed out that in 2018 investment spending is likely to grow only by 6% having barely increased at all in 2017. To 2020, production increases from non-OPEC countries are by themselves enough to meet demand growth. After that time, the pace of growth from these countries is less certain, and the market might well need the supplies currently being held off the market by leading producers.

The past month has been relatively uneventful in terms of data changes, apart from an increase to our demand growth estimate. Crude oil prices are slightly lower than last month, and have generally been relatively stable for several weeks. Even so, the value of Brent crude oil is still averaging close to $67/bbl in 2018, which is about 20% higher than in the early part of last year.

Looking at demand, our estimate for global growth in 2018 has increased by 90 kb/d taking it up to 1.5 mb/d. Although this is a modest revision, it is interesting that provisional data suggests very strong starts to the year in China and India, which, taken together, accounted for nearly 50% of global demand growth in 2017. Cold weather in some parts of the northern hemisphere in January-February saw an increase in heating demand.

On supply, new and revised data shows very little change in the outlook versus last month. Although US production was lower than expected in December, there is no change to our overall 2017 number neither to our outlook for 2018 that expects crude output there to grow by 1.3 mb/d. We retain our view that total non-OPEC production grew by 760 kb/d last year and that it will surge by 1.78 mb/d this year. Within the OPEC countries, the biggest risk factor is, and will likely remain, Venezuela. Our estimate for February shows output down again, by 60 kb/d. Other countries with a risk factor include Libya, and, to a lesser extent, Nigeria. In Libya, we saw another modest supply gain in February to 1.02 mb/d and, although stability cannot be taken for granted, it appears that the frequency and severity of production interruptions is declining and higher rates of output are being maintained. Taking OPEC as a whole, quota compliance in February was 147%, but even if Venezuela's production were at its allocated level, the group's compliance would still be close to 100%.

Stocks, and specifically OECD stocks, remain the most-cited indicator of oil market re-balancing. In this Report, we note that in January they increased month-on-month for the first time since July. However, the increase of 18 mb was half the average level for January seen in the past five years. Indeed, the surplus of total OECD stocks against the five-year average fell for the ninth successive month to 50 mb, with products showing a very small deficit.

In the meantime, market re-balancing is clearly moving ahead with key indicators - supply and demand becoming more closely aligned, OECD stocks falling close to average levels, the forward price curve in backwardation at prices that increasingly appear to be sustainable - pointing in that direction. In our chart, we assume for scenario purposes that OPEC production remains flat for the rest of 2018, and on this basis there will be a very small stock build in 1Q18 with deficits in the rest of the year. With supply from Venezuela clearly vulnerable to an accelerated decline, without any compensatory change from other producers it is possible that the Latin American country could be the final element that tips the market decisively into deficit.

Moving further into the future than is usual in this Report, in the IEA's five-year outlook, published in Oil 2018 - Analysis and Forecasts to 2023, we highlighted how in 2017 discoveries of new resources fell to a record low of only 4 bn barrels while 36 bn barrels were actually produced. We also pointed out that in 2018 investment spending is likely to grow only by 6% having barely increased at all in 2017. To 2020, production increases from non-OPEC countries are by themselves enough to meet demand growth. After that time, the pace of growth from these countries is less certain, and the market might well need the supplies currently being held off the market by leading producers.