Oil Market Report - September 2019

• Our 2019 and 2020 global oil demand growth forecasts are unchanged at 1.1 mb/d and 1.3 mb/d, respectively. Growth was 0.5 mb/d in 1H19 and fell as low as 0.2 mb/d in June. For 2H19, we assume no further deterioration in the economic climate and in trade disputes. Oil demand growth will be significantly higher helped by a comparison versus a low base in 2H18, lower oil prices versus a year ago and additions to petrochemicals capacity. July data show y-o-y growth of 1.3 mb/d.
• A post-hurricane rebound in the US raised global oil supply by 530 kb/d in August to 100.7 mb/d. US expansion, plus big gains from Norway and Brazil, is set to boost non-OPEC growth from 1.9 mb/d this year to 2.3 mb/d in 2020. The non-OPEC surge will cut the need for OPEC crude to 28.3 mb/d in 1H20, 1.4 mb/d below the group’s August output. Compliance with the OPEC+ agreement fell to 116% in August. In June, the US overtook Saudi Arabia to become the world’s top oil exporter..
• The recent fall in global refining activity bottomed out in July, and throughput is set to return to y-o-y growth in 4Q19. Increased activity may depress refining margins from their current levels which are the highest for 2019. Preparations for the International Maritime Organisation’s new fuel emission standards are likely to offer support through stronger pricing for compliant fuels. We believe that, overall, the IMO regulations will be introduced with relatively little disruption.
• OECD commercial stocks increased by 1.5 mb in July to 2 931 mb, and stood 19.7 mb above the five-year average. Stocks in terms of days of forward demand rose by 0.1 days to 60.5 days, which is 1 day below the average. Preliminary data for August show inventories falling in US and Europe, while stocks increased in Japan. Floating storage of crude oil rose by 7.9 mb in August to 66.1 mb due to an increase of numbers of tankers storing crude oil in Iran.
• ICE Brent and NYMEX WTI are currently trading at $61/bbl and $56/bbl, respectively, having risen from seven month lows in early August. They are both about 20% below year-ago levels. US prices were boosted as new pipelines to transport crude from the Permian Basin came online and contributed to a narrowing of the WTI-Brent differential. Middle distillate cracks have strengthened ahead of the new IMO shipping fuel regulations.

• Our 2019 and 2020 global oil demand growth forecasts are unchanged at 1.1 mb/d and 1.3 mb/d, respectively. Growth was 0.5 mb/d in 1H19 and fell as low as 0.2 mb/d in June. For 2H19, we assume no further deterioration in the economic climate and in trade disputes. Oil demand growth will be significantly higher helped by a comparison versus a low base in 2H18, lower oil prices versus a year ago and additions to petrochemicals capacity. July data show y-o-y growth of 1.3 mb/d.
• A post-hurricane rebound in the US raised global oil supply by 530 kb/d in August to 100.7 mb/d. US expansion, plus big gains from Norway and Brazil, is set to boost non-OPEC growth from 1.9 mb/d this year to 2.3 mb/d in 2020. The non-OPEC surge will cut the need for OPEC crude to 28.3 mb/d in 1H20, 1.4 mb/d below the group’s August output. Compliance with the OPEC+ agreement fell to 116% in August. In June, the US overtook Saudi Arabia to become the world’s top oil exporter..
• The recent fall in global refining activity bottomed out in July, and throughput is set to return to y-o-y growth in 4Q19. Increased activity may depress refining margins from their current levels which are the highest for 2019. Preparations for the International Maritime Organisation’s new fuel emission standards are likely to offer support through stronger pricing for compliant fuels. We believe that, overall, the IMO regulations will be introduced with relatively little disruption.
• OECD commercial stocks increased by 1.5 mb in July to 2 931 mb, and stood 19.7 mb above the five-year average. Stocks in terms of days of forward demand rose by 0.1 days to 60.5 days, which is 1 day below the average. Preliminary data for August show inventories falling in US and Europe, while stocks increased in Japan. Floating storage of crude oil rose by 7.9 mb in August to 66.1 mb due to an increase of numbers of tankers storing crude oil in Iran.
• ICE Brent and NYMEX WTI are currently trading at $61/bbl and $56/bbl, respectively, having risen from seven month lows in early August. They are both about 20% below year-ago levels. US prices were boosted as new pipelines to transport crude from the Permian Basin came online and contributed to a narrowing of the WTI-Brent differential. Middle distillate cracks have strengthened ahead of the new IMO shipping fuel regulations.

The oil market focus recently has been on demand as growth weakens amidst uncertainty around the global economy, and particularly trade. In this Report, we maintain our growth estimate for 2019 at 1.1 mb/d, even though June data show that demand increased year on year by less than 0.2 mb/d. For the second half of 2019 we retain the view that with oil prices currently about 20% lower than a year ago there will be support for consumers. Early data for July suggest that global demand grew by 1.3 mb/d y-o-y.

In recent weeks, tensions in the Middle East Gulf have eased and oil industry operations appear to be normal. The major political event that has taken place is a personnel change in Saudi Arabia with the appointment as energy minister of Prince Abdulaziz bin Salman, who is a well-known and experienced figure. An early event for him is a meeting of the OPEC+ agreement monitoring committee that takes place in Abu Dhabi as we publish this Report. To date, support for the agreement rate has been high, but ahead of the meeting data for August show the compliance rate slipping to 116 per cent. In August, three major countries Russia, Nigeria and Iraq, produced 0.6 mb/d more than their allocations. Saudi Arabia, on the other hand, produced 0.6 mb/d less than allowed, and it is clearly the lynchpin of the whole deal. A reminder to the producers that competition for market share is getting tougher comes from preliminary data showing that in June the US momentarily overtook Saudi Arabia and Russia as the world’s number one gross oil exporter.

Our balances for 2H19 imply a stock draw of 0.8 mb/d, based on the assumption of flat OPEC production, stronger demand growth and weaker non-OPEC supply growth. However, this is only really a breather: the 2H19 non-OPEC growth, although modest by recent standards at “only” 1.3 mb/d, is measured against the high base set by the enormous production surge seen this time last year. So far in 2019, US crude oil production growth has stalled with June output only 45 kb/d higher than in December. Even so, output is still growing strongly on an annual basis, rising this year by 1.25 mb/d, with 1 mb/d of growth to come in 2020. In Norway, long awaited projects are coming on stream earlier than expected and may ramp up to peak production ahead of schedule. Oil production in Brazil is growing fast, reaching 3 mb/d in August, 0.4 mb/d higher than just two months earlier.

While the relentless stock builds we have seen since early 2018 have halted, this is temporary. Soon, the OPEC+ producers will once again see surging non-OPEC oil production with the implied market balance returning to a signifcant surplus and placing pressure on prices. The challenge of market management remains a daunting one well into 2020.

Finally, in January the International Maritime Organisation’s new marine fuel regulations are being introduced. In Oil-2019: Analysis and Forecast to 2024, published in March, we concluded that markets will be generally prepared for the shift, assuming a certain initial level of non-compliance. In this Report, we have looked at the latest developments in demand and refining and we reaffirm our view of a relatively smooth start for the new rules. In line with this view, markets are not currently signalling significant increases in diesel prices, but this is an issue that will be monitored closely.

The oil market focus recently has been on demand as growth weakens amidst uncertainty around the global economy, and particularly trade. In this Report, we maintain our growth estimate for 2019 at 1.1 mb/d, even though June data show that demand increased year on year by less than 0.2 mb/d. For the second half of 2019 we retain the view that with oil prices currently about 20% lower than a year ago there will be support for consumers. Early data for July suggest that global demand grew by 1.3 mb/d y-o-y.

In recent weeks, tensions in the Middle East Gulf have eased and oil industry operations appear to be normal. The major political event that has taken place is a personnel change in Saudi Arabia with the appointment as energy minister of Prince Abdulaziz bin Salman, who is a well-known and experienced figure. An early event for him is a meeting of the OPEC+ agreement monitoring committee that takes place in Abu Dhabi as we publish this Report. To date, support for the agreement rate has been high, but ahead of the meeting data for August show the compliance rate slipping to 116 per cent. In August, three major countries Russia, Nigeria and Iraq, produced 0.6 mb/d more than their allocations. Saudi Arabia, on the other hand, produced 0.6 mb/d less than allowed, and it is clearly the lynchpin of the whole deal. A reminder to the producers that competition for market share is getting tougher comes from preliminary data showing that in June the US momentarily overtook Saudi Arabia and Russia as the world’s number one gross oil exporter.

Our balances for 2H19 imply a stock draw of 0.8 mb/d, based on the assumption of flat OPEC production, stronger demand growth and weaker non-OPEC supply growth. However, this is only really a breather: the 2H19 non-OPEC growth, although modest by recent standards at “only” 1.3 mb/d, is measured against the high base set by the enormous production surge seen this time last year. So far in 2019, US crude oil production growth has stalled with June output only 45 kb/d higher than in December. Even so, output is still growing strongly on an annual basis, rising this year by 1.25 mb/d, with 1 mb/d of growth to come in 2020. In Norway, long awaited projects are coming on stream earlier than expected and may ramp up to peak production ahead of schedule. Oil production in Brazil is growing fast, reaching 3 mb/d in August, 0.4 mb/d higher than just two months earlier.

While the relentless stock builds we have seen since early 2018 have halted, this is temporary. Soon, the OPEC+ producers will once again see surging non-OPEC oil production with the implied market balance returning to a signifcant surplus and placing pressure on prices. The challenge of market management remains a daunting one well into 2020.

Finally, in January the International Maritime Organisation’s new marine fuel regulations are being introduced. In Oil-2019: Analysis and Forecast to 2024, published in March, we concluded that markets will be generally prepared for the shift, assuming a certain initial level of non-compliance. In this Report, we have looked at the latest developments in demand and refining and we reaffirm our view of a relatively smooth start for the new rules. In line with this view, markets are not currently signalling significant increases in diesel prices, but this is an issue that will be monitored closely.