The global oil market shows signs of tightening into this year’s second quarter, mainly because of a decline in supply. However, there are mixed signals in terms of the outlook for demand and whether stock levels are yet “normal,” the International Energy Agency said in its latest Oil Market Report.
ICE Brent reached a 5-month high above $71/bbl in early April on supply concerns. New infrastructure capacity in the US helped the West Texas Intermediate crude price to narrow its discount to Brent to $7/bbl.
Oil supply
The huge increase in oil production seen in second-half 2018 has reversed following the implementation of the new Vienna Agreement and the increasing effectiveness of sanctions against Iran and Venezuela.
According to IEA data, global oil supply dropped 340,000 b/d in March, as the cuts of the Organization of Petroleum Exporting Countries and certain non-OPEC partners deepened, and Venezuelan output fell sharply. At 99.2 million b/d, it was 3.1 million b/d below November 2018 and up 530,000 b/d year-over-year.
OPEC and its allies called off a planned meeting on Apr. 17-18 to review the pact and will decide instead whether to extend the cuts on June 25-26. At that time, a clearer assessment could be made of the crisis in Venezuela and the impact of US sanctions on Iran.
OPEC crude
OPEC crude oil production tumbled 550,000 b/d in March, to 30.1 million b/d, on further cuts from Saudi Arabia and steep losses in Venezuela. Saudi output dropped to its lowest level in more than 2 years, boosting compliance with supply cuts to 153%. The call on OPEC rises to 30.9 million b/d in this year’s second quarter.
Output from Iran held at 2.74 million b/d in March, down 1.1 million b/d compared with when US sanctions were announced last May. Libya turned in the biggest production increase in March, with output rising by 200,000 b/d after El Sharara oil field returned to full capacity. By the end of March, production reached 1.2 million b/d—the highest level since 2013. Despite the recovery, the oil sector once again looks vulnerable as the Libyan National Army (LNA) marches on Tripoli.
Non-OPEC supply
Non-OPEC supply growth has decelerated sharply from the breakneck pace seen in second-half 2018 when output surged by 3.4 million b/d year-over-year. The pace slowed to 2.4 million b/d in this year’s first quarter, with the US accounting for 92% compared with 80% over the course of 2018.
Excluding the US, non-OPEC growth plunged from nearly 1 million b/d in fourth-quarter 2018 to 185,000 b/d in this year’s first quarter. Moreover, output cuts in Canada and from OPEC+ producers, steep declines in North Sea production, and seasonally weaker biofuels output saw total non-OPEC production in this year’s first quarter fall by 740,000 b/d compared with fourth-quarter 2018.
“While non-OPEC supply is expected to rebound from the second quarter onwards, the pace of growth is set to ease further,” IEA said.
A slowdown in drilling activity at the start of the year, lower capital budget allocations, increasing base decline and parent-child well interference underpins IEA’s weaker growth projections for the US. Expansions in Canada, which averaged nearly 400,000 b/d last year, have stalled and further declines are expected in Mexico and the North Sea. Brazil is set to rebound, however, as new units ramp up. For the year, non-OPEC growth slows from last year’s record 2.8 million b/d to 1.7 million b/d.
Oil demand
IEA’s global demand growth estimates for 2018 and 2019 are again unchanged at 1.3 million b/d and 1.4 million b/d, respectively. After a slow start to the year, demand growth of the Organization for Economic Cooperation and Development will be 300,000 b/d, with non-OECD growing by 1.1 million b/d, according to IEA forecast.
In China, preliminary oil demand numbers for the January-February period show solid growth of 410,000 b/d year-over-year. The Chinese economy seems to be reacting to the government’s stimulus measures with purchasing managers’ indices increasing and export orders recovering, although there are signs that air cargo volumes might be falling.
Over the same period, demand in India rose by 300,000 b/d year-over-year, and US demand, which continues to be supported by the petrochemical business, rose by 295,000 b/d year-over-year.
Although the main sources of growth are doing well, there are mixed signals from elsewhere.
“Overall demand in the OECD countries fell by 300,000 b/d year-over-year in 2018 fourth quarter, the first such fall for any quarter since the end of 2014, and it is likely to have fallen again in 2019 first quarter due to weakness in some European economies, with perhaps more to come if there is a disorderly Brexit,” IEA said.
Meanwhile, there are uncertainties in Argentina and Turkey and signs of only modest demand recovery in the Middle East despite the stimulus provided by rising crude oil prices. Concerns about trade talks linger, and the mood will be influenced by the recent downgrade to global gross domestic product growth by the International Monetary Fund, although it should be noted that the IMF does not expect a recession in the near term.
Elsewhere, OECD industry stocks fell by 21.7 million bbl month-over-month in February to 2,871 million bbl, the first reduction after 3 months of increases. Stocks fell by more than the 5-year average of 5.1 million bbl for the month due to larger-than-usual gasoline draws and a lower-than-seasonal build in crude holdings.
Total stocks remain 16 million bbl above the 5-year average, but on a forward demand basis they are below it, by 1.1 day, at 60.6 days.
