Fundamentals is our monthly review of global oil data, this is the March 2017 edition.
Despite all the doom and gloom in the market, 2017 balances have not deteriorated as such, and we still expect stockdraws of 0.7 mb/d across the year. However, Q1 17 expected stockdraws have moderated to 0.2 mb/d, although visible stockbuilds in the quarter so far have built by 0.60 mb/d, partly due to the surge in Q4 16 OPEC production and exports that only reached their designated destinations over January and February, resulting in elevated OECD imports.
It is this lack of visible inventory stockdraw that is the root of the market’s bearishness. But this does not mean that inventories are building everywhere. Floating storage and inventories held in far-away locations, such as Saldanha Bay or in the Caribbean, is slowly being unwound. Yet, it is this destocking that has hit the physical crude market hard, as offshore stockdraws have led to onshore stockbuilds.
Inventories should start drawing from late March in the US, and from late April in the rest of the world, but hefty stockdraws will only begin in May given that refinery runs will rise substantially then. That said, the market is currently dealing with an enormous volume of unplanned refinery outages and Asian planned works are creeping higher for May and June, now above 2 mb/d for each month. The fact that product markets are doing better should provide some comfort for the bulls here. The negative effects of the demonetisation in India are largely behind us now, LatAm (namely Mexican) demand is recovering following the price hikes, and even though petrochemical prices have started to come off a bit, we are also seeing end-user demand perk up as tertiary stocks have been run down, forcing buyers to come to the market.
Indeed, the apparent softness in early Q1 17 demand despite stellar macroeconomic indicators is likely linked to end-user destocking, and, anecdotally, there are now signs that end-user demand in both the US and Europe is rising. This means refiners will be incentivised to run as they return from maintenance, and, until the overhang has been absorbed, there will be enough crude around. Q1 and Q2 always see crude stockbuilds. What was worrying was that product stocks were also building. Now that is changing, and so, as long as the market is patient, there should be enough price upside waiting in the summer.