Fundamentals is our monthly review of global oil data, this is the November edition.
The tone of macroeconomic data over the past month has brightened further, with data points from China in particular showing signs of improvement. Chinese PMI went above 50 for the first time in 13 months in November, according to the preliminary reading of HSBC's purchasing managers' index. The US continues to provide positive signals despite distortions to several economic indicators due to Hurricane Sandy, which is making it harder to gauge the underlying health of the economy. In our view, Europe remains the primary source of uncertainty after it officially went into recession in Q3.
Although still tentative, demand indications have definitely started showing more life. The strong recovery in Chinese demand has been sustained and demand growth from India was particularly noteworthy in October, whilst Middle Eastern demand remains robust. The return of Chinese oil demand growth together with the continuation of the rest of non-OECD continuing on their strong growth path could easily propel global oil demand higher in 2013, especially as US demand indications have also improved materially. There are still concerns of course. European oil demand remains weak, while concerns about the fiscal cliff are restraining US activity. Most important perhaps is the recent deterioration in the Asian petchem market, where naphtha margins have collapsed to 3 ½ month low, on rising supplies (from India and the West) and constrained buying.
The pick-up in runs following the return of refineries from maintenance and outages is weakening product market balances. Although supply is returning, distillate demand is picking up in both China and the US, and with the Northern Hemisphere winter forecast to be substantially colder than last year, heating oil demand should receive a boost.
The latest data on non-OPEC supplies in October continue to paint a picture of contrasting fortunes; US oil production continues to grow strongly whilst the rest of non-OPEC supply largely suffers from outages, field declines and geopolitical issues. OPEC oil production in October was pegged at 31.18 mb/d, higher y/y by 1.36 mb/d and largely unchanged from September output. The largest m/m increases were from Angola and Iraq (0.06 mb/d and 0.04 mb/d respectively) whilst the largest declines came from Nigerian (0.05 mb/d) and the UAE (0.04 mb/d).
The disappointment in non-OPEC supplies together with the decline in OPEC volumes have continued to keep markets tight in Q3 despite the pick-up in Iranian exports. Following a large stock-draw in August, the stronger than expected demand indications and weaker than expected non-OPEC supplies ex-US in September also resulted in a small stock draw. The seasonal pick up in North Sea and FSU volumes are lending support to an improvement in the supply picture somewhat over the next few months, however, the recovery in demand in China and in the US threatens to absorb any increases in supply currently taking place. As we highlighted in our demand review, the strength in non-OECD demand seems to be more than a temporary bounce (with y/y growth in the 5 main non-OECD countries back above 1 mb/d from September onwards) although it still remains tentative, while the upcoming winter demand should provide further support.