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|
|Source: Datastream, Energy Aspects||Source: EIA, Energy Aspects|