Fundamentals is our monthly review of global oil data, this is the February edition.
Our Q4 17 balances have become tighter following the release of the latest round of fundamental demand and supply data, as November 2017 OECD demand was revised higher by over 0.5 mb/d spanning Europe and Canada. Final US November demand figures had already come in stronger than our expectations, rising y/y by 0.6 mb/d. This meant OECD demand growth was a solid 1.4 mb/d, but, more impressively, global oil demand growth was a staggering 3.2 mb/d, averaging just shy of 100 mb/d. This represents the highest pace of growth since 2010, when demand was recovering from the global financial crisis of 2008/09, and goes a long way in explaining why identified global inventories drew by 1.6 mb/d despite US crude production rising by a mammoth 1.1 mb/d across Q4 17.
JODI data, which while patchy and questionable for many parts of the world, show huge drops in inventories in November and partial December data point to the same trend. This means the starting point for 2018 balances is tighter than initially expected (and in complete contrast to IEA’s preposterous claims of no stockdraws in Q4 17), leaving 2018 balances susceptible to outages.
Right now, balances are soft. It is that awkward time of the year when refineries have stopped buying crude as they prepare to head into maintenance, but, because these works are due, product markets are still weak as prompt runs remain high. Crude trades further forward than products, so this is a normal feature ahead of turnarounds. In recent years, this trend has become amplified as, increasingly, heating demand is met by non-oil sources, and the last few winters, including the current one, have been exceptionally warm by historical standards.
We currently hold our 2018 demand growth projections of 1.7 mb/d, and while heating demand has been woeful in Europe likely pushing demand in the continent lower y/y in both January and February, we still maintain that there is more upside than downside to our demand estimates. There is nothing to suggest that global economic growth has lost any steam.
So, balances should get stronger in H2 18, even though several banks seem to think, counter-intuitively, that H1 18 balances will be more bullish than H2 18 balances due to stronger growth in US production in the second half of the year. Our balances show average stockdraws of 0.5 mb/d in H2 18, even after assuming 0.25 mb/d more production from OPEC and Russia in H2 18 vs H1 18. The story around US production hasn’t changed too much—there are some who believe US crude output will rise by 1.7 mb/d (with total liquids north of 2 mb/d), while others believe crude production growth will be around 1-1.2 mb/d. We are clearly in the latter camp and our scepticism is borne out of the view that there will be insufficient pipeline takeaway capacity from the Permian basin this year.
On OPEC, while several investment banks seem to be obsessed with the view that OPEC will abandon the deal and flood the market, this could not be further from the truth given the strong co-operation being seen between Saudi Arabia and Russia. Yes, compliance will slip, but that has already been factored into our balances, and there isn’t a lot of spare capacity within OPEC outside of the GCC, which tends to be more compliant than the other regions.