Fundamentals is our monthly review of global oil data, this is the June edition
Despite a pick-up in global demand due to a significant improvement seen in Asian (ex China) economies in May, oil market fundamentals weakened, but led by products rather than crude. In fact, with China continuing to absorb a significant tranche (around 0.8 mb/d) of crude for its SPR in May, crude markets remained tight. Indeed, OECD crude stocks, after rebuilding in April by 8 mb, reversed course in May, falling m/m by 8 mb by our estimates.
But OECD product stocks have built by around 60 mb across April and May according to our initial estimates, erasing much of the deficit to last year's levels and seasonal averages from the start of the year. We are not in an oversupply environment yet, but the recent builds explain the downward pressure on product prices and the argument of tight inventories seen at the start of the year supporting prices no longer holds.
Heading into the summer, however, when demand picks up seasonally, some of this product overhang should be absorbed, especially if the El Niño effect results in significantly stronger Indian and Middle Eastern demand right through the summer, continuing the record high demand seen in May. If this results in a jump in refinery runs, crude prices can receive a significant boost given that the supply side is ever more precarious.
Not only are North Sea (in particular UK) and FSU supplies set to fall seasonally on very high field maintenance, OPEC's production outlook is extremely bleak, especially following the current crisis in Iraq. Saudi Arabia will have to raise its output to meet the rising call on OPEC crude (which averages nearly 31 mb/d in Q3 14) and, to balance the market, stocks will need to be drawn again (by approximately 0.6 mb/d). Should there be any further unplanned outages on top of the current losses in Libya, Iraq and Nigeria, the upside risk to oil prices will be significant.