Fundamentals is our monthly review of global oil data, this is the February 2017 edition.
Despite the OPEC cuts, global inventories have continued to build. Yet, our implied global stock change for Q1 17 is -0.4 mb/d, suggesting inventories of oil liquids will decline q/q in Q1 17. This seems to be at odds with the 50 mb of OECD crude stockbuilds reported so far. One can argue that stocks should draw in March as the deluge of Middle Eastern barrels that set sail in November and December 2016 would have worked their way through the system by then, but even so, to get to a 0.4 mb/d stockdraw (-27 mb) would imply a miraculous turnaround. Part of the issue here is that while the market only tends to look at crude and the main products such as gasoline and diesel, inventories of LPG and NGLs have been plummeting.
Still, these hefty LPG and NGLs drawdowns would only blunt the extent of the total stockbuilds in Q1 17, not reverse them into draws. Here, we need to look back at Q4 16 balances, which implied liquids stockbuilds of 0.6 mb/d. Yet identified stocks across the OECD, China, India, Saudi Arabia, UAE, Singapore and Brazil—in other words, the key hubs—fell by 0.58 mb/d. During that time—excluding Iranian floating storage, which fell—floating storage rose by 15-25 mb. Even taking the upper end of this range, Q4 16 stocks still drew by close to 0.27 mb/d. That leaves a discrepancy of 0.87 mb/d between implied builds of 0.6 mb/d and the identified stockdraws of 0.27 mb/d. In contrast, this quarter, our balances imply a stockdraw of 0.4 mb/d. But based on builds in the OECD so far and the usual SPR builds in China in Q1, onshore crude stocks are likely to rise by 0.75 mb/d this quarter. Floating storage, however, is falling and should decline by around 30 mb across Q1 17. Still, adjusting for the drawdown in floating storage, global liquids (ex-Iranian condensate) stocks should build by around 0.40-0.45 mb/d in Q1 17.
This suggests a discrepancy of 0.80-0.85 mb/d between the 0.3 mb/d implied stockdraw and the 0.45 mb/d build in identifiable inventories. Netting these out and assuming our Q1 17 stockbuild figures are correct, across Q4 16 and Q1 17, implied liquids stockbuilds amount to 0.2 mb/d, while identified stockbuilds add up to around 0.15 mb/d. In short, despite the really large headline stockbuilds so far this quarter, averaging it across the last few months provides a far clearer picture of what truly lies beneath. Because the surge in production came towards the end of the last quarter rather than at the start, the effects of the oversupply in Q4 16 are being felt in early 2017.
We maintain our view that these draws are likely coming in March, as crude on the water has plummeted. In the near term, physical grades may come under some pressure due to hefty refinery maintenance, but the markets should be headed towards backwardation in the summer as long as the current output cuts remain in place.