Fundamentals is our monthly review of global oil data, this is the May edition
Over the past month, macro data releases have demonstrated that the global economic outlook remains vulnerable. Economic data from China has certainly softened through April and May, with the HSBC flash manufacturing PMI falling to 49.6, a 7 month low, from the final reading of 50.4 of April.
Not surprisingly, oil demand growth has slowed substantially compared to the highs of Q4 12 and January this year. Global oil demand growth in March was broadly flat y/y at just under 88 mb/d (with Q1 13 demand averaging 89.1 mb/d), relative to our expectations of growth of 0.5 mb/d. European oil demand proved to be the largest weighing factor, as any positive effects from increased heating oil demand owing to the extreme cold weather were more than offset by severe declines in demand for transportation fuels. Mexican, Brazilian and Saudi oil demand were also lower than our expectations, while South Korea surprised to the upside.
In April though, indications for global oil demand have improved, particularly from Asia, as anecdotal evidence from China suggests a pick-up in gasoline sales, while the distortions pertaining to warm weather in OECD Pacific seem to be easing, with South Korean oil demand in April higher y/y by 4.1%, the strongest growth in 6 months. Our preliminary estimates for April point to y/y global demand growth of 0.6 mb/d to 88.6 mb/d.
However, despite the pick-up in demand, global oil supplies outpaced demand for the second straight month. Non-OPEC supplies were higher y/y by over 0.5 mb/d in April, not just due to strong US production growth but also easing declines in the rest of the world, due to start-ups of Frade, and the Elgin-Franklin fields. OPEC production, too, was higher m/m on higher Iraqi and Saudi volumes but remained lower y/y by over 1 mb/d.
In the coming months, however, various planned field maintenance, such as in the Gulf of Mexico and in the North Sea, is set to reduce non-OPEC supplies through Q2 13 and largely offset the recovery in South Sudanese volumes. Moreover, the Middle East and Africa continue to grapple with political unrest and, in our view, the market is far from realising the true extent of these changes and the resultant impact on regional stability.
Given that overall supplies outpaced demand quite substantially in April, inventories built by a large 1.5 mb/d, higher than our expected Q2 13 average build of 0.8 mb/d, but lower than the build seen in March of nearly 1.8 mb/d, as demand fell sharply. Across Q1 13, stockbuilds were around 0.9 mb/d. Going forward, we expect demand to pick up more substantially, helping to absorb much of the oil supplies. Furthermore, various planned (Gulf of Mexico, North Sea) and unplanned outages (Libya, Nigeria, Brazil among others) are reducing supplies through Q2 13 and offsetting the return of Sudanese volumes from this month. As a result, we expect stockbuilds to be far lower in May and June, with Q2 13 average stockbuild at 0.8 mb/d. That said, visible crude stock increases have been lower than the headline figures, as a large part of the crude stocks have been absorbed in line and tank fills of new refineries and pipeline infrastructure.
Currently, most of the uncertainty lies on the demand front. The macro data is doing little to inspire confidence and that remains the largest downside risk to balances. The supply side, on the other hand, is more fragile, despite the market view of abundance, which is largely thanks to the optimism around US tight oils. The overall impact on prices is likely to be one where the upside is significantly capped without a major headline on supply disruption, with any further deterioration on the macro front once again opening the doors below $100 per barrel, in the near term. Ultimately, should the recovery in global demand pan out as expected, global balances will start to look healthier from Q3 13 onwards.