Fundamentals is our monthly review of global oil data, this is the January edition.
Since the end of Q1 17, we have been running down stocks at a pace of over 1 mb/d. Identified inventory drawdowns were a massive 2 mb/d in Q4 17, with stocks built through 2015 and 2016 being offloaded at a record pace as the crude curves flipped into backwardation. While OPEC discipline helped, ultimately it was demand that saved the day. Q4 17 was probably the first time in at least a decade when almost every country in the world was exhibiting strong economic momentum, and oil demand followed.
Saudi Arabia is probably still the weakest spot, but higher oil prices have meant the government could roll back some of the austerity measures, and so, we feel that demand weakness in the Kingdom has bottomed out for now. In short, there is no real drag on demand growth. This is precisely why even with a conservative OECD demand growth forecast for 2018, our global demand growth estimate is still a solid 1.7 mb/d, with a low base likely to improve Indian, Brazilian and Saudi demand growth this year. Should the OECD surprise to the upside—which is highly plausible in the current economic backdrop—global oil demand could rise y/y by 2 mb/d.
While there is upside risk to our overall demand figure, particularly from the OECD, as we only expect 0.1 mb/d of y/y growth in 2018, there is possible downside risk to our H2 18 demand growth figures if oil prices continue to rise. In other words, H1 18 demand may outperform expectations and H2 18 could underperform.
It is worth noting here that given just how strong global oil demand has been and how robust the macroeconomic backdrop currently is, the IEA’s reluctance to raise demand growth estimates is raising more than just a few eyebrows. The IEA’s misdiagnosis is causing it to overly dampen demand forecasts in response to the higher prices which it fails to acknowledge were attributable to such strong demand. Our numbers show that the IEA has underestimated Q4 17 demand by 0.6 mb/d and is likely compounding the situation in its forecast for 2018.
In the near term, crude markets will soften as refinery maintenance picks up, but any pullback will be limited. Not only are global stocks low and the buffer largely gone, Chinese commercial refinery gate stocks are at a record low. Given the swift rally in oil prices, Chinese refiners are likely holding back on buying for now, especially as expectations are that the upcoming refinery works will lead to a correction in prices. This also means that fears about a flood of products from China about to hit the Asian market are largely unfounded in the near term. Increasingly, there are few compelling reasons to hold a short position in crude, especially if the market has managed to absorb over 1 mb/d of y/y US production growth since September 2017 and still managed to rally. That simply shows just how strong demand is and, to some extent, how poor supplies are elsewhere.