Fundamentals is our monthly review of global oil data, this is the December edition. Happy holidays, we'll see you in the new year!
As 2017 draws to a close, all eyes are on 2018 balances and there is significant debate about next year’s potential stockbuilds or stockdraws driven by varying estimates of US production growth. Crude stocks tend to rise during turnarounds, but it is important not to get carried away with these stockbuilds. While US and Canadian production will grow strongly, some of this will be offset by losses elsewhere. In the North Sea, according to Ineos, the FPS operator, Buzzard’s output is set to fall sharply in Q1 18. In the FSU, we expect little incremental volume as problems plaguing Kashagan are unlikely to be sorted before March.
Moreover, given that spring 2018 refinery maintenance is lower y/y in every region except for the Middle East, OPEC production matters more than ever. The risk was that these refinery works could free up anywhere up to 1 mb/d of Middle Eastern crudes for export at a time when other refineries are also undertaking works. But if OPEC can keep production (and exports) in check, crude builds will be substantially lower than the market currently expects.
So our view remains that, absent an exogenous shock, prices should ease seasonally during the quarter, as will the extent of backwardation as some of the urgency to own prompt barrels eases. But given low inventory and spare capacity levels and the expected geopolitical tensions going forward, once refiners come out of maintenance, there may be more of a bid for barrels than perhaps is generally understood.
Indeed, here, the importance of the FPS outage cannot be underestimated. Even though Brent spreads have sold off recently as the market winds down for Christmas, the FPS outage has ultimately led to the shutdown of the fields feeding the pipeline. Moreover, Norwegian production has also started surprising to the downside, and not just because of Goliat’s outage. Brazilian production has also underwhelmed across H2 17, with November production lower again y/y.
Finally, much of 2018’s balances will depend on how demand performs. It may well take a bit of time for consumers to get used to the recent sudden increase in oil prices, but we do not believe the flat price of crude is yet high enough to dent robust gasoline demand, especially as the global economic backdrop remains strong.