The global oil market is on a strong footing heading into 2018. Stocks are falling rapidly and the market is entering 2018 with a very limited buffer just as geopolitical risks ratchet higher. Our latest assessment pegs the global liquids inventory overhang at around 70 mb, as the pace of stockdraws has accelerated. In October, the market had to absorb 2.3 mb/d of liquids, of which 1.9 mb/d was crude. China alone destocked nearly 34 mb of crude. Even if one assumes this destocking took place over two months, as suggested by some satellite imagery, the market has still absorbed an enormous amount of crude. Meanwhile, floating storage has also fallen, by some 20 mb over October, and crude stored in Saldanha Bay and the Caribbean has also been pulled out of caverns. Barrels being offered out of storage in Asia are allegedly stocks that were built a few years ago when the market was starting to get oversupplied. In other words, pretty much every barrel stored in every nook and cranny seems to be hitting the market now.
So, it should hardly come as a surprise that prompt differentials have eased if the market has had to absorb 1.9 mb/d of crude from storage. And even if one doubts such a large figure for just one month, averaging out September and October still gives an extremely impressive drawdown rate of 0.9 mb/d. The backwardation in crude has now lasted for long enough that it has effectively enticed all the discretionary crude held in storage to be unwound, and during peak refinery works too. Some of those unwound barrels from storage are only arriving at the destinations now, depressing prompt buying. That is why the physical market feels a bit soft right now. Once refineries are back from maintenance, the prompt ‘indigestion’ will start to ease as they return in earnest to buy for future runs. Already, as US refiners return from maintenance, US crude grades are being bid up to keep them at home and limit exports. This will help tighten global markets. Importantly, this sets us up for a tight 2018 as we will enter next year with hardly any excess in crude and with sharply lower product stocks y/y.
Given rising unplanned outages—in particular in the Americas with the 0.58 mb/d Keystone pipeline shut, the outage of Shell’s Enchilada, Salsa and Auger platforms and the rapidly deteriorating situation in Venezuela—and the ongoing shut-in of volumes from Kurdistan, the prompt oversupply may disappear more quickly than initially expected, especially as we expect OPEC to continue restraining output through 2018 and demand growth to remain robust as discussed earlier.