Fundamentals is our monthly review of global oil data, this is the May 2019 edition.
Crude oil balance:
The latest data releases confirm global stocks drew in Q1 19, with our balance showing a 0.1 mb/d draw over the quarter. The counter-seasonal drop in stocks was mainly a result of underperforming production, with US, Mexican, Brazilian and Norwegian crude production data all coming in below expectations. The most significant change was the sudden drop in Venezuelan production in March, which almost halved from January levels to just 0.65 mb/d as power reliability issues crimped loadings.
Our Q2 19 crude balance still shows a sizable crude draw of 0.6 mb/d, albeit softer than the 1.3 mb/d draw indicated in our April Fundamentals publication. The main reason for the change is lower runs, which have dropped 1.0 mb/d since last month’s data. OPEC crude and condensate production also fell by 0.4 mb/d versus last month as Saudi Arabia is set to keep output comfortably below 10.3 mb/d through June, while Nigeria and Libya struggled with output in May.
Q3 19 continues to display our most constructive quarter in the crude balance, showing a draw of 1.6 mb/d—marginally less than the 1.7 mb/d in April’s Fundamentals, though still the most bullish print we have seen in years. We are expecting a 2.3 mb/d q/q increase in runs globally, barring unforeseen outages, as refineries ramp up; 1.9 mb/d of the increase is West of Suez, supported by an increase in US utilisation added to seasonally peaking runs in Europe and the FSU. Q3 19 turnarounds are set to be lower y/y as refiners run in preparation for IMO 2020. East of Suez runs will be higher by 0.9 mb/d y/y in Q3 19 due to the new refinery starts in China, Malaysia and Brunei.
Our Q1 19 liquids balance shows a draw of 0.4 mb/d, down from 0.5 mb/d forecast last month, though both demand and supply came in lower than expected. OECD demand underperformed by 0.2 mb/d in Q1 19, possibly due to destocking in a backwardated market, although it is likely European demand will be revised upward as it typically is. However, weaker demand was met by lower production as non-OPEC supply came in below expectations, with the US, Mexico and Norway all underperforming.
Our May Q3 19 liquids balance is 0.2 mb/d below our April estimate, showing a 0.8 mb/d draw, which will be heavily crude dominated. Demand is lower by 0.1 mb/d on last month at 101.6 mb/d, though given our expected increase in refinery runs, product stocks will likely build in Q3 19 while crude stocks will draw heavily. On the production side, we continue to see higher NGLs production in North America, which supports the 0.3 mb/d increase in liquids output for the quarter from last month’s balance. By contrast, OPEC liquids production is lower by 0.1 mb/d as Iran and Venezuela struggle to sustain production levels over H2 19.
Overall, there are plenty of dark clouds for demand on the horizon, which will make it very hard for crude to rally, especially if uncertainty around future demand once again triggers destocking by end-users (although we understand end-user stocks are low following the significant destocking in Q4 18). Our global demand projections for 2019 have always been extremely benign at around 1 mb/d, with OECD demand forecast to fall by 0.3 mb/d. Even if demand comes in lower than we expect, it is unlikely to undershoot sharply. But this also means OPEC+ will hold their line in the now most likely July meeting, refraining from raising production. The supply side of the market is extremely tight and we do not see much that will derail that side of the oil market balance. It is demand that is now the variable but as long as demand does not contract y/y, we still believe the market will need more OPEC oil in Q3 19, implying higher prices.