Fundamentals is our monthly review of global oil data, this is the July 2017 edition.
While the market’s focus remains on crude, it is products that continue to go from strength to strength. East of Suez, product markets have eased somewhat as refineries finally return from extended works, but underlying demand remains solid. West of Suez, despite near-record runs, product stocks continue to draw. For instance, in the US, product stocks excluding ‘other oils’ have drawn by 11.2 mb over the last three weeks at a time when they usually build by 11.4 mb. Even counting ‘other oils’, total US product inventories have declined by nearly 9 mb while the five-year average build for the equivalent three weeks is 16.9 mb. So, the overhang of products has reduced by nearly 26 mb in contrast to the crude overhang, which has fallen by 8.2 mb. In all, despite 3.6 mb of SPR release, the overhang of total US inventories has declined by 33.7 mb in the last three weeks, led by products.
In Europe, despite European refinery runs being 0.53 mb/d higher y/y, product stocks drew in May, with distillates lower m/m by 14.8 mb and gasoline by 3.6 mb. Distillate stocks were lower y/y for the first time since February 2015 despite high runs. Over the first five months of 2017, European fuel oil stocks fell by nearly 6.5 mb to 75 mb, which is the lowest level on our records going back to 2002. With European fuel oil demand edging higher on strong bunker demand and utility requirements in several countries, forward cover sat at 66 days of supply in May, even tighter than the 82 days of supply logged in May 2016. Overall, we maintain our global stockdraw forecast of close to 1 mb/d across H2 17.
As long as crude prices are kept above $50-55 per barrel, and due to OPEC’s inability to keep a lid on exports (although if Saudi Arabia fulfils its promise to keep exports at 6.6 mb/d from August, this may change but we are sceptical), demand will grow rapidly. Indeed, near-final May global demand rose y/y by 2.5 mb/d, the strongest pace since November 2016. In Europe, demand is soaring, led by higher trucking mileage, which is helping to draw down diesel inventories in the region. European May oil demand rebounded strongly and was up y/y by 0.49 mb/d to 15.34 mb/d. April’s demand numbers were also revised upwards by 0.18 mb/d, confirming our suspicion that demand was underreported, just as European March demand was revised higher by over 0.3 mb/d when the April data were published.
Strong demand will ensure lofty refining margins and will ultimately have to pull crude higher. For now, there is still a decent volume of crude overhang to chew through, but it is definitely coming down. As of end-June we estimate that the OECD crude overhang had fallen to 100 mb, although the products overhang was still hefty at over 170 mb. In July, the overhang of crude and products has fallen further. Floating storage has also drawn, by an estimated 6-7 mb last week. In all, we believe the global inventory overhang has likely fallen by 40-45 mb in July so far, with the reduction in products overhang constituting two-thirds of the decline. Still, it is fair to assume that the OECD crude overhang will be below 100 mb by the end of July. While we are not tight yet, OPEC has demand to thank for getting it out—at least marginally—of the quagmire it has gotten itself into.