The past week has seen the release of key agency forecasts, with the EIA and OPEC reports coming out on Tuesday and the IEA releasing its report this morning.
All three key agency reports were broadly aligned in stating that the current oil market remains adequately supplied. All three also continue to highlight the growth in US tight oil as the reason why we should get to looser balances going forward. In fact, the OPEC report communique chose to focus on global PMIs when global unplanned outages are running at record levels. At least the EIA highlighted that disruptions in August reached 2.7 mb/d, the highest levels since January 2009, when the EIA began tracking outages.
The reality of course, couldn't be more different. End demand continues to hold, as evidenced by the IEA revising Q3 13 demand higher for the second month in a row, by 0.26 mb/d, and despite sharply depreciating currencies in many emerging markets including India. Supply shortages continue to mount, with Libyan production currently at just 10% of the country's capacity; Iraqi exports disrupted due to the maintenance at the SPM and even the rebound in North Sea production from seasonal maintenance marred by technical problems, the latest one being corrosion at the Ekofisk field.
Not surprisingly, in July, OECD commercial inventories built by a meagre 8 mb, compared to seasonal averages of nearly 22 mb, taking the deficit to the five-year average to 65 mb, the widest since October 2011. Preliminary data for August shows a counter-seasonal 14.2 mb draw, led by a near 20 mb drop in crude stocks offsetting a much lower than usual 5 mb build in refined products.
Given the tightness in the market, crude demand is starting to fall, as weak margins are forcing widespread voluntary run cuts. Yes run cuts will help to cap oil price upside but the causality is important to establish. The IEA is making this exact mistake by assigning run cuts as the cause for balances to ease in the future, not the result of the current tightness. In other words, if crude demand does not correct lower, oil prices will be significantly higher. However, with the IEA using lower runs as a way for balances to get weaker in Q4 13, there is little justification for the agency to argue that the market needs its crude and hence, this makes stocks releases unlikely in the near term.