On demand

Published at 12:59 7 Aug 2017 by

Despite the strengthening of crude timespreads, particularly Brent, which is leading to the release of crude from storage, physical differentials are holding up. Not only are heavy crudes performing strongly—which is to be expected given both OPEC and non-OPEC producers are primarily cutting heavy grades—but even light crude differentials have firmed far beyond our expectations.

Clearly, this is not due to tighter supplies. Indeed, light crude production rose y/y by 1.5 mb/d across Q2 17 as Libyan and Nigerian production returned strongly and US growth gained momentum. So, once again, we suspect it is demand that is leading the way. Indeed, naphtha spreads have moved into backwardation in Asia and Europe, contrary to our expectations.

While strong propane prices and the recovery in gasoline demand have helped naphtha, petrochemical demand is soaring, confirmed by the Q2 17 earnings of major chemical companies. Stellar US demand numbers in May pushed up global oil demand growth to 3 mb/d for the month.

Against the current economic backdrop, $45-55 oil is simply too low and is leading to phenomenal demand strength. Currently, global oil stocks are some 200-250 mb higher than the five-year average, but as global demand has increased by 5.5 mb/d over the last three years, the overhang will not need to fall all the way to the five-year average for the market to tighten.

Prices are still likely to pullback in the coming months as some of the seasonal strength abates and the focus turns back to 2018 balances. But the extent of the pullback can be tempered if the current demand strength continues, especially as US shale production, while growing strongly, is not surprising to the upside as the latest earnings season revealed, with gas-to-oil ratios in focus.

Fig 1: Brent 1st-12 month spread, $ per barrel Fig 2: US oil demand, y/y change, mb/d
Brent 1st-12 month spread US oil demand
Source: Datastream, Energy Aspects Source: EIA, Energy Aspects

Log in to download

Other Perspectives publications

Pace yourself

Published 4 days ago

2017-12-11 Oil - Perspectives - Pace yourself cover

This is the final edition of Perspectives for the year. Normal service will resume on 8 January 2..

Read more

Taper tantrum 2.0

Published 1 week ago

2017-12-04 Oil - Perspectives - Taper tantrum 2.0 cover

OPEC and non-OPEC countries decided to extend the current output cut deal through 2018, albeit wi..

Read more

Job done or unfinished business?

Published 2 weeks ago

2017-11-27 Oil - Perspectives - Job done or unfinished business? cover

Helped by an extended outage on TransCanada’s Keystone pipeline, WTI—the very last cr..

Read more

Run chase

Published 3 weeks ago

2017-11-20 Oil - Perspectives - Run chase cover

Record destocking of nearly 2 mb/d of crude (2.4 mb/d of liquids in total) in October has meant t..

Read more

Biding time

Published 1 month ago

2017-11-13 Oil - Perspectives - Biding time cover

Even as rising geopolitical risks are supporting oil prices, timespreads are languishing. Huge vo..

Read more