Fundamentals is our monthly review of global oil data, this is the September edition
While Q2 13 was all about the upside surprise in demand, Q3 13 has turned out to be about downside surprise in supplies, from both non-OPEC and OPEC countries. At a time when seasonal maintenance commenced, OPEC has seen large volumes of production being taken offline, as a result of political unrest in Libya and sectarian violence alongside infrastructure-related maintenance work in Iraq. Indeed, OPEC production is set to fall well below 30 mb/d in September, even with Saudi Arabia pumping at record levels of 10.2 mb/d.
Across Q3 13, non-OPEC supplies increased q/q by a mere 0.3 mb/d, despite US supplies continuing to grow at record levels of nearly 1 mb/d y/y and Canadian output picking up to record highs. OPEC supplies meanwhile are set to average below 30 mb/d across the quarter, driven largely by the sharp fall in September. Together with a q/q swing of over 1 mb/d in global oil demand, led by a sharp improvement in China (better domestic and external growth environment), easing declines both in Europe (improved macroeconomic backdrop) and in OECD Asia Pacific (record high temperatures boosted fuel use in power consumption), global oil inventories are set to draw by a hefty 1.1 mb/d across the quarter. The sharp reduction in global refinery runs for now, on the back of both maintenance and voluntary run cuts, is easing the extent of stockdraws somewhat currently, but will not be enough to reverse the large deficit this quarter.
Heading into Q4 13, our expectations are for another quarter of stockdraws, despite the seasonal pick up in non-OPEC supplies from maintenance to well above 55 mb/d. The drawdowns are a result of global oil demand picking up to 92 mb/d, with the improvement in western economies continuing and economies where a large part of GDP is determined by global trade, for instance South Korea, China and other Asian countries, benefitting from an overall improvement in the global economy. This is already evident in both the South Korean and Chinese economies, with Q3 13 oil demand benefiting commensurately.
The other part of the equation for stockdraws to continue is for OPEC production to remain weak, which comes despite Saudi Arabia maintaining crude production near 10 mb/d (at 9.9 mb/d, with the slight easing due to lower domestic demand for crude in power generation). Iraqi exports from the South will be constrained by at least 0.5 mb/d in October, due to the ongoing maintenance work at the SPMs, while we see little respite from constant bombings of the Kirkuk-Ceyhan pipeline, especially given the negative impact it is starting to have on output from the Kirkuk and adjacent fields due to reservoir damage from constant well shut-ins. The start-up of Majnoon and Gharraf should support production into year end, although early volumes from both fields will be small and the risk of delays to the maintenance programme in the South cannot be ruled out.
Meanwhile, in Libya, we expect output to recover to 0.8 mb/d, assuming that the protests in the West can remain curtailed and some production from the East restarts too. But we highlight various red flags to the backdrop in the country. The issues of autonomy and accusations of government corruption remain unresolved and are now being fuelled by claims that bribes were offered to security guards to end their protests. Finally, together with planned maintenance on Qua Iboe and Bonga fields, oil theft in Nigeria continues relentlessly. We expect Nigerian production to stay below 2 mb/d in Q4 13. Thus, while we expect OPEC output to rise to 30 mb/d in Q4 13, a mild improvement, the risk for OPEC remains that output disappoints, which would increase the extent of Q4 13 stockdraws, posing upside pressure on prices and Brent spreads.