Fundamentals is our monthly review of global oil data, this is the February 2019 edition.
Our Q4 18 balances deteriorated further this month as final demand readings came in shockingly low. Global oil demand fell y/y by 0.39 mb/d in December 2018 to 98.91 mb/d, around 1.1 mb/d lower than our preliminary indications. This would constitute the first outright decline in demand since September 2016 and the biggest decline since June 2009. While our assumption that US demand will come in weaker than weekly preliminaries may prove incorrect, there is no denying that European demand fell out of bed, plunging by 0.83 mb/d y/y. In total, OECD demand fell by 1.1 mb/d y/y in December 2018. Non-OECD demand growth also stalled, rising by barely 0.7 mb/d in December, as Chinese demand growth was a mere 0.19 mb/d y/y.
For production, there was no change to our OPEC forecasts although US production was raised by 0.2 mb/d following a strong November print. With crude runs for December falling y/y, Q4 18 crude stockbuilds amounted to 1.9 mb/d. But even though refinery runs fell sharply in Q4 18, the sharp deterioration in demand growth meant this did not light a fire in products markets. Put differently, if not for falling runs, the collapse in demand in Q4 18 would have sent product stockpiles soaring and markets into contango.
On the other hand, Q1 19 balances have turned out to be more constructive as preliminary indications for demand show a gradual pick-up in Europe and China and a significant recovery in India. Even though runs are still low especially as maintenance is in full swing, our crude balances have gone from showing a 0.6 mb/d build last month to now showing just a 0.1 mb/d rise. Total liquids are now set to draw by 0.7 mb/d. The main culprit here is OPEC production—the outage at Libya’s Sharara field, the significant loss of Venezuelan exports and Saudi Arabia’s overcompliance meant that our Q1 19 OPEC estimate, as forecast in December, was overoptimistic to the tune of 0.5 mb/d. Even with Sharara coming back by end-February (looking increasingly at risk), we have had to revise our Q1 19 OPEC supply estimates lower still, on the back of sharply lower Saudi output for March and as the political standoff in Venezuela looks set to extend into next month.
Medium and heavy crudes are flying, but with Saudi Arabia’s decision to cut Arab Extra Light volumes to some refiners in the east, even lighter grades such as Murban have started to recover. There is still around 30 mb of crude stuck in the Turkish Straits and crude from the 0.3 mb/d Sharara field is yet to start flowing—so there are some barrels to be absorbed, just as ARA crude stocks have started to climb again. A bit of a wobble in differentials and spreads is therefore likely, but we are not expecting a collapse, especially with steep upstream maintenance planned in Kazakhstan in April and the North Sea in May and June. As a result, crude stocks have failed to build materially in Q1 19, which means there will be little buffer when runs start to climb in the summer.
Q2 19 balances are constructive as refineries return from maintenance and as new refineries ramp up. China’s Hengli and Malaysia’s RAPID are both ramping up over the next month and we expect crude stocks to decline from May onwards, taking the full quarter’s decline to 0.8 mb/d. Of course, demand will determine just how much refinery runs have to rise from here, but if we are right, and global economic growth is unlikely to worsen from here—even if it doesn’t rebound—oil demand will pick up from Q4 18’s devastating performance. In this case, crude markets will tighten from May onwards, especially as new refining capacity ramps up. Indeed, for oil demand, the peak of destocking is likely behind us. Not only have oil prices recovered somewhat, but policy support is coming from the US, with the Fed pausing rate hikes, the ECB, which is considering fresh stimulus, and China, which is taking targeted measures to ease credit and stimulate the economy. Put it differently, even if the data does not get significantly better soon, it is unlikely to get worse either and these measures will certainly help keep the bottom from falling out.