Fundamentals is our monthly review of global oil data, this is the March edition
The improvement in oil market balances seen over Q4 faded somewhat in January and further in February. In particular, macroeconomic data and demand indications have become worrisome of late, particularly from Europe and Asia. While the deterioration has not been enough to set alarm bells ringing, it should not be ignored either, especially given the considerable weakening in the Asian petrochemical sector recently. Although global demand growth for January was revised higher and currently stands at 1 mb/d, in February, global demand growth was higher y/y by 0.5 mb/d, and in March we expect demand growth to have slowed to 0.2-0.3 mb/d, due to a reversal of the improvements in European demand and slowing in Chinese demand. In particular, we believe China has switched to destocking mode, due to weak end product demand and high stockpiles.
Supply shortfalls continued in February, with problems in non-OPEC countries outside the US and OPEC countries persisting along with Saudi Arabian supplies continuing to be throttled back. Indeed, OPEC production was lower y/y by over 0.7 mb/d. The extent of non-OPEC shortfalls was slightly higher in February compared to January. However, due to easing demand growth, the scale of stockdraws in January, although small, moderated further in February, with supply-demand balances broadly flat. March has seen a new wave of supply shortfalls, particularly in OPEC nations of Libya and Nigeria together with large upgrader maintenance in Canada, more than offsetting the improvement in supplies in the North Sea and the potential resumption of some of South Sudan's oil output from end March.
However, we expect stockbuilds in March, not only in products, as end product demand seems to have weakened, but also in crude, due to the heavy refinery maintenance. The strength in product prices throughout February that lent support to margins has also corrected, with the unseasonal tightness in light ends easing in March, although we expect the regulations around RINs will continue to keep US product prices supported beyond the near term correction. Meanwhile, the weakening in crude fundamental balances is already being reflected in the easing of Brent spreads (with concerns over the future of the Korean arb also playing a part), where prompt backwardation has roughly halved from $1 in late February. Worse still, European margins have fallen considerably in recent days, raising doubts whether even when these refineries return from maintenance, there will be an appetite to run. Physical grades in the rest of the world still seem fairly well supported, signalling that appetite for crude in Asia is seemingly unperturbed so far, in anticipation that refineries will run hard following their return from heavy maintenance from May onwards. However, if the first visible signs of weakness in demand prove to be more than just a blip, we would expect physical grades to follow Brent spreads and decline from the current strong levels.
All in all, fundamentals have weakened considerably since our last monthly update and thus, we expect downside pressure on prices to remain, at least until more clarity emerges on the macroeconomic front. The key to follow will be the European macroeconomic backdrop as a worsening of the outlook there has a direct bearing on Asia, given that Europe is Asia's largest trading partner.