Fundamentals is our monthly review of global oil data, this is the June edition.
Our 2018 balances have not moved much since last month, despite OPEC deciding to raise production in H2 18. This is partly because we had already factored in 0.5 mb/d of more GCC and Russian production in H2 18 vs H1 18, and now after the recent meeting, we have upped our estimate to 0.7 mb/d. This may seem low given al-Falih’s comments of up to 1 mb/d, but we understand that the real increase will be closer to 0.6 mb/d (though July will be high), which explains why several ministers went on record with this figure, contradicting al-Falih. The incremental volume above a 0.7 mb/d increase will come as declines from other nations gain pace. We have pencilled in benign declines from both Iran and Venezuela, so we will hold the incremental average GCC and Russian output increase at 0.7 mb/d and adjust later if needed.
We expect Saudi production to average 10.5 mb/d in Q3 18, with some months pushing close to record highs over 10.6 mb/d. We understand that June production is around 10.3 mb/d and July will be 0.3 mb/d higher m/m (there are some suggestions that July output will hit 10.8 mb/d)—so Saudi Arabia has already started to raise production. A lot of the extra barrels are heading into Aramco-held storage across the world, preparing for sharp Iranian output drops later this year; so even though ‘exports’ are high, not all this oil is necessarily reaching refineries. The Kingdom is not discounting its crude to gain market share and we do not expect it to do so going forward, but the barrels are there on offer, although in a backwardated market Saudi crudes are the most expensive barrels available. The sole objective is to ensure no shortages arise. But this means that the rise in Saudi output has come faster than the losses from Iran. This will reverse in the future, but it goes a long way in explaining why the physical market has been softer than expected. The oil price tends to reflect forward balances, but timespreads tend to reflect more prompt fundamentals, so this explains the recent divergence here.
Despite adjusting our Q3 18 Saudi production figures by 0.42 mb/d, our global H2 18 stockdraw is only reduced by 0.1 mb/d to 0.5 mb/d. This is because of our further downward adjustment to Iranian production but also new losses from Libya and Nigeria. Overall draws are biased towards Q4 18, at 0.8 mb/d, vs 0.2 mb/d in Q3 18—a downward revision of 0.15 mb/d. We note significant downside risk to our forecast for Iran, where we see H2 18 output just 0.26 mb/d lower than H1 18. If Iranian production falls by more than this, it would be prudent to assume even higher Saudi production, although the more output increases, the more spare capacity is eroded—capacity that will be needed later.
In terms of more immediate balances, Q2 18 demand has been reduced by 0.36 mb/d thanks to particularly lousy Saudi demand, although better than expected OECD demand (yet again) helped to offset the much larger non-OECD demand revisions. With non-OPEC supply revisions minimal, our Q2 18 stockdraws now stand at 0.2 mb/d, with global draws also at 0.2 mb/d.