Fundamentals is our monthly review of global oil data, this is the April 2017 edition.
Global oil demand eased q/q in Q1 17, but by less than seasonal averages and from a record high base. So, with OPEC output 1 mb/d lower q/q and non-OPEC production falling by around 0.5 mb/d q/q despite rising US output, inventories should have started to decline. Our balances point to a 0.2 mb/d draw in global molecules. Yet, the first cut of full Q1 17 data show a 0.5 mb/d build in total inventories, with crude builds at around 0.35 mb/d, compared to 1.1 mb/d in Q1 16. This is because the surge in Q4 16 OPEC crude production only showed up in stockbuilds in Q1 17, adjusted for sailing times.
But taking this build at face value would be a mistake. Crude stocks always build during Q1 and early parts of Q2—this is seasonal—but this year, they have built by less than usual despite having to contend with the tsunami of OPEC exports from Q4 16 arriving at discharge ports in early 2017 and much higher refinery maintenance (up by 1.5 mb/d y/y). For instance, preliminary data show OECD commercial crude stocks rising m/m by 10 mb in March, but the overhang fell by 31 mb m/m to 156 mb compared to 197 mb in January.
Moreover, there has been a sharp drawdown in invisible inventories, of around 55 mb on our estimates, although anecdotally, the range varies from 40-80 mb. There is also the drawdown of stocks across nearly all OPEC producer nations over Q1 17. All of these stockdraws are undoubtedly bullish, although they have the disadvantage of releasing stocks from locations that have no influence on marker grades (Brent, WTI, Dubai).
The reality is that if timespreads (both Brent and Dubai) had not tightened up so early in this cycle (February and even in March for Dubai), the market would not have had to contend with 55 mb of stocks being released from storage at the peak of refinery maintenance, thereby making prompt crude balances sloppy.
Currently, it is products markets rather than crude that are strong. Gasoline stocks in PADD 1 have moved lower y/y and the forward import arb remains shut. And despite the stubborn refusal of ARA stocks to march lower, US and Asian middle distillate inventories have been falling, and have halved the overhang versus 2015 levels in visible inventories to just 17 mb. Fuel oil stocks are also declining, driven by a sharp drawdown in Fujairah inventories. And the market is showing signs of good demand with cash buyers paying premiums to lift cargoes and increasing tightness emerging in the utility-grade 180 cst market.
So, summer should bring with it hefty crude (and overall global molecule) stockdraws as refineries will be back in full swing globally. The strength in products will ensure that refiners run when they return from maintenance. We continue to expect Q3 17 stockdraws of 1.2 mb/d, and believe that the market will be far more balanced at year-end, given our expectation that the OPEC deal will be extended, most likely for six months.