Sentiment in the oil market remains morbid even though the physical market is perhaps showing some signs of emerging green shoots, thanks to Chinese teapots slowly starting to come back to the market for crude. China has undoubtedly overbought, but it has not overbought to the tune of 1 mb/d as implied stockbuild figures would suggest. A lot of crude has gone into linefill and tank bottoms, while the growing trend of teapots supplying PX plants means an increasing amount of Chinese runs are not captured in the statistics, overinflating implied stockbuilds.
Floating storage is also causing headaches. The return of Nigerian and Libyan production led to light crudes building up in the Atlantic basin, but the recent chatter about the rise in floating storage may have gone too far, as in Asia, oil on water is slowly being absorbed by refiners.
Our supply-demand balances show a 0.3 mb/d draw in Q2 17, around 0.1 mb/d lower than a month ago but down by 0.5 mb/d from our peak draw estimate, when we had not factored in a sustained recovery in Nigeria and Libya. But we continue to expect a 1 mb/d average drawdown in H2 17 stocks, as we were already expecting higher production from both these countries.
As we stand today, balances are far from dire. Even the biggest bears will agree that over the next few months, stocks will draw. But the market is being dictated by the fear (even if irrational to some degree) of impending weakness in 2018, especially in light, sweet crudes. So, having lost its faith in OPEC, it is dragging prices down today to prevent that future catastrophe by probing the shut-in point for shale. If OPEC and Saudi Arabia do not act quickly to turn this around, even if fundamentals warrant $50-60 oil right now, near-term, sentiment can drive prices lower still.
|Fig 1: OECD crude overhang to 5-yr avg, mb||Fig 2: Key identified stock changes, mb/d|
|Source: IEA, Energy Aspects||Source: Government agencies, Energy Aspects|