Fundamentals is our monthly review of global oil data, this is the March edition.
Compared to our balances published last month, 2018 balances have become marginally tighter, mainly for Q1 18, while balances across Q2 18-Q4 18 are broadly unchanged. Interestingly, the Q1 18 tightening in balances comes despite what has been a seasonal soft period for prices, but, as we have been arguing for several weeks now, this is mere seasonality. Our view has always been for a steady increase in prices in H2 18 and while we can still not rule out a wobble in April if the market starts to panic about large crude stockbuilds, given that this is a futures market and we will be trading June barrels by then, the worst should be behind us.
Importantly, the driver for Q1 18 stockbuilds coming in lower than expected (currently at 0.2 mb/d compared to our initial estimates of 0.5 mb/d) is supply rather than demand. In fact, January global oil demand came in around 0.6 mb/d lower than estimated due to a warm start to the winter. Instead, the tightening in balances has occurred due to both OPEC and non-OPEC supplies—primarily the latter—underperforming.
Output from every single country outside of the US and Canada (as final data for neither country has been released) has underperformed what were already conservative expectations in January and February. In Latin America, Brazilian production has now fallen for four consecutive months, while Colombian production also underachieved, owing to militant attacks on oil infrastructure. In China, since December 2017, production has come in around 40 thousand b/d lower than our estimates. Output has also fallen short of our expectations in Norway where production has declined for five straight months, Mexico, Egypt, Malaysia, Indonesia and several other nations.
Moreover, OPEC production has also come in weaker, led by Venezuela. While we place Venezuelan output at 1.6 mb/d in February, anecdotal reports suggest production could have fallen much further already. Together with the rising spectre of US sanctions on both Venezuela and Iran, downside risk to supplies is on the rise.
With global inventories largely at the five-year average—in other words, the overhang that existed over the last three years has now gone—any stockdraw from here will tighten markets. The builds in Q1 18 were supposed to offer a small cushion for the upcoming quarters, during which we see stockdraws averaging 0.55 mb/d. Our expectations for Q1 18 stockbuilds were always lower than seasonal averages (close to 0.8 mb/d), but given that our balances currently show barely built stocks in Q1 18, the subsequent stockdraws could push us to the bottom of the inventory range seen over the last 10 years, especially if the geopolitical outages materialise.