Fundamentals is our monthly review of global oil data, this is the May edition.
Our 2018 balances have tightened nominally since last month, with H2 18 balances becoming tighter but Q2 18 going the other way. Near-final data for Q1 18 still shows no stockbuilds, as was expected at the start of the year, with OECD demand performing well over January and February and non-OECD demand having recovered from March onwards. Non-OPEC supplies outside North America continue to underperform and even though Brazilian production managed to grow m/m, it still came in lower than our already feeble expectations. Only Egypt managed to surprise to the upside, leading us to raise our estimates there.
Q2 18 stockdraws have reduced by around 0.1 mb/d relative to last month’s report mainly due to our downward revision to demand estimates. We have reduced Latin American demand growth across the year following the recent collapse in their currencies and deteriorating macroeconomic backdrop, while persistently low fuel oil readings have led us to trim Pakistani demand growth marginally as well. Crude stocks built in April, particularly in Europe, underpinned by record US exports and peak refinery maintenance, and while May builds are less than seasonal averages, the builds are set to continue nonetheless. The draws this quarter will be concentrated in products with crude draws starting from June.
Our H2 18 balances have tightened, unsurprisingly due to US sanctions on Iran, but with Iran likely to fill storage first before cutting production, we do not expect output to fall till Q4 18. Should the dollar sanctions which come into effect within 90 days squeeze buyers by more than we currently expect, we may also need to modify our Q3 18 forecasts. However, compared to our balances last month, our Q4 18 stockdraws are only higher by 0.1 mb/d despite Iranian output cut by 0.37 mb/d. This is because we have raised our Q4 18 forecasts for GCC and Russian production further and now expect combined production from these countries to be 0.50 mb/d. This is also why our non-OPEC forecasts have risen for the year compared to last month.
It is important to note that we do not expect OPEC to start raising production from June—as they will not pre-empt any possible drop in production from Iran. We are simply being conservative and ensuring that our balances allow for ‘cheating’ by signatories. Moreover, while there is talk of some OPEC countries possibly reducing overcompliance, this does not mean that they will start raising production to backfill for losses arising from natural declines in countries such as Angola and Venezuela. Instead, this is about Saudi Arabia and a few other countries bringing their compliance to 100% instead of over-complying. Were this to occur (and so far we have heard no indication that this is even being considered), additional OPEC output would be 0.26 mb/d (by bringing everyone’s compliance to 100% barring Venezuela and Angola), but this would still be far less than the 0.5 mb/d we have already factored in.