Worries about the global economy continue to cap crude prices even as the physical market is roaring ahead at a time when it should be extremely subdued given refinery works. These worries have merit—after all, near-final data for December show global oil demand fell y/y by the most since 2009, driven by Europe’s horrific readings. Asian demand was also weaker as the Chinese economy stalled, and the feedback effects cascaded through the region.
While the early 2019 macro readings have been mixed, they have not deteriorated. And policy support from the US Fed, ECB and Chinese government will keep the bottom from falling off. Preliminary European oil demand shows a recovery in January, while Indian demand rebounded strongly thanks to pre-election government support, something Indonesia will also see.
Still, it is because of extremely weak refinery runs—driven in large part by heavy destocking as the market assumed a repeat of 2008—that product markets (barring light ends) are strong but not on fire despite the collapse in Q4 18 demand. Yet, crude markets are performing remarkably given those same putrid runs. Many physical differentials—particularly medium and heavy sour grades such as Urals, Djeno, Cabinda and others—are at record highs for the time of the year.
In fact, as supplies continue to disappoint, we have revised our crude stockbuilds down again this week, to now stand at just 0.1 mb/d for Q1 19, which means there will be little buffer when runs start to climb in the summer. Demand will determine just how much refinery runs have to rise from here, but if we are right about global economic growth being unlikely to worsen from here, then crude markets will tighten further from May, especially as new refining capacity ramps up.
|Global oil demand, y/y change, mb/d||Cabinda diff to Dated Brent, $ per barrel|
|Source: Government agencies, Energy Aspects||Source: Argus Media Group, Energy Aspects|