Our latest assessment of the global inventory overhang pegs the excess at 120–130 mb, with around 105 mb of that in the US. However, the pace of draws has undoubtedly slowed in recent weeks due to a slowdown in demand growth. Indeed, Q3 17 demand was revised lower by a hefty 0.62 mb/d due to extremely weak readings from the Middle East, weakness in India and the expected drop in US and Caribbean demand following hurricanes. We had already pencilled in a sharp slowing in global oil demand growth to 1.5 mb/d y/y in Q3 17, from 2.2 mb/d y/y in Q2 17, as some of the strength seen then was unlikely to be sustainable. However, we subsequently revised our Q3 17 global demand growth lower still to 1.3 mb/d.
Indeed, even though OECD stocks declined counter-seasonally in September by 32 mb, inventories on a days of forward cover basis worsened. Total OECD liquids days of forward cover rose from 63 to 64 in September and, while still lower y/y, the surplus to the five-year average rose by two days last month. It is possible that Q3 17 OECD demand will be revised higher—indeed, European and Canadian demand have been subject to regular upward revision in recent months, and some intra-month demand volatility is to be expected, especially in summer. That said, anecdotal reports suggest demand has softened.
Nonetheless, we believe the softness across August and September, which is likely persisting through October, will abate from next month. So, we retain our November and December demand growth estimates of around 1.5 mb/d. The current environment is a mere soft patch and as long as the broader economic indicators hold up—which they are currently—oil demand will rebound into year-end.
This temporary lull in demand growth is why the pace of product stockdraws has softened. Indeed, our global balances show stockdraws of 0.6 mb/d in September, compared to small draws of less than 0.1 mb/d seen on average across the last 10 years, while stocks are likely to build by 0.1–0.2 mb/d in October, although this still represents relative tightening compared to usual builds of around 0.5 mb/d.
Nonetheless, when compared to the average draws of 0.9 mb/d seen between March through to August (against 10-year average builds of 0.5 mb/d during that period), while inventories continue to tighten, the pace has undoubtedly slowed. However, given our expectation that demand will rebound from November, we see large stockdraws resuming, at an average pace of 1.4 mb/d across November and December, compared to the 10-year average draw of just 25 thousand b/d.