The recently published Oil Market Report (OMR) has signalled a return to balance as being the big picture direction in which the market is heading. This report follows after oil prices saw some big action packed year when the prices were sliding daily, the fact that crude oil has in the past two months moved within a range in the high $40s/bbl should be a relief for some producers.
The adjustments to our data this month suggest that little has changed with the market showing an extraordinary transformation from a major surplus in 1Q16 to near-balance in 2Q16. In mid-summer 2016, although market balance is upon us, the existence of very high oil stocks is a threat to the recent stability of oil prices: in 1Q16 refinery runs growth was 60% higher than refined product demand growth. Despite the regular upwards revisions to demand that we have seen in recent Reports there are signs that momentum is easing; and, although stocks are close to topping out, they are at such elevated levels, especially for products for which demand growth is slackening, that they remain a major dampener on oil prices. With global refinery runs expected to fall by 0.8 mb/d in 2Q16 before surging by 2.4 mb/d in 3Q16, we may well see crude oil stocks fall back but there is a risk that, unless demand turns out to be stronger than we currently anticipate, products stocks could rise still further and threaten the whole price structure.
In China, for example, data for May suggests that year-on-year demand growth was only 130 kb/d, part of a recent trend of smaller increases. For the United States, estimated gasoline deliveries in April were up just 75 kb/d up on the year earlier and 410 kb/d below our expectations. Somewhat unexpectedly, the saving grace for oil demand has been Europe where, in 2Q16 y-o-y growth reached a five-quarter high. This is unlikely to last, though, with the ongoing precariousness of the European economies now dealing with added uncertainty following the result of the UK referendum on membership of the European Union.
On the supply side of the balance, our forecasts for non-OPEC production have proved to be accurate so far in 2016. Non-OPEC production remains on course to fall by 0.9 mb/d this year before staging a modest recovery in 2017. For low-cost Middle Eastern OPEC countries plus other regional producers, including Bahrain and Oman, production has grown steadily in recent years, with notable increases contributed by Iraq in 2015 and Iran in 2016. In the heady days when US shale production was moving upwards very fast it became fashionable to talk of lower reliance on traditional suppliers.
Chart shows that in fact oil output from the region rose to a record high in June, with production above 31 mb/d for the third month running. As such, the Middle East’s market share of global oil supplies rose to 35%, the highest since the late 1970s and an eloquent reminder that even when US shale production does resume its growth, older producers will remain essential for oil markets.
Investment will also be important, as the IEA has regularly stated. Chevron’s announcement that it is moving ahead with a $37 billion expansion of the Tengiz field in Kazakhstan is good news, but the fact that the project will partly utilise existing infrastructure is key to making it viable at today’s oil prices. There is still an ominous investment gap building up in the oil industry that might, depending on how quickly today’s record high oil stocks are eroded, create the conditions for sharply higher prices over the medium term.
Our underlying message that the market is heading to balance remains on track, but the modest fall back in oil prices in recent days to closer to $45/bbl is a reminder that the road ahead is far from smooth.
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Source: International Energy Agency
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