Global trade concerns haunt oil market
International trade concerns once again came to the fore after reports that the US could impose 10% tariffs on additional Chinese goods worth $200 bn with an expected reciprocal reaction from China. The news affected markets across the globe, including Europe and Asia, however, expectations of a better earnings season and higher corporate profits in the US offset some of the negative mood in the market. Oil prices also receded, as a result, as an international trade dispute between two of the largest economies could depress oil demand.
The trend in oil prices reversed after remaining elevated over the last few weeks on the news that the US could soften its stand on Iran sanctions and allow some countries to be exempt from sanctions to import crude from the OPEC-member. In addition, Libya’s oil production, which was suffering from a force majeure at several ports that halved the country’s output, was reportedly back online. The aforementioned factors resulted in the biggest single-day drop in Brent crude in 2 years on 11-July-18.
Factors that supported oil prices primarily included production outages in key oil producing countries. A production disruption in Western Canada last month affected 10% of the country’s production, although output is expected to come back online sooner-than-expected during Q3-18. In addition, a strike in Norway shut a North Sea oil field affecting around 23 tb/d of oil production. Moreover, Iran is said to have communicated to its Asian crude buyers, specifically with India, to continue trade with them beyond the November-18 deadline for the implementation of the sanctions. The country also lowered light oil price to Asia for the first time in four months.
Production by OPEC remained almost flat at 10.3 mb/d during June-18 after increase in oil production by Saudi Arabia was almost completely offset by a decline in production in Libya, Angola and Venezuela. The increase in the Kingdom’s oil production came after it was decided in last month’s OPEC meeting to modestly increase oil supplies from OPEC and non-OPEC producers by around 1 mb/d.
Meanwhile, the IEA, in its monthly update, highlighted a slowdown in oil demand in Q2-18, after a strong start during Q1-18, due to rising prices. According to the report, growth is expected to decline to 1.3 mb/d during 2H-18 after 1.5 mb/d during 1H-18. Growth during 1H-19 is expected to decline to 1.2 mb/d y-o-y due to high base effect and later increase to 1.6 mb/d during 2H-18. In terms of US oil production, the US EIA kept production expectation for the current year unchanged at 10.79 mb/d with production reaching 11.29 mb/d in the last quarter. However, the agency raised 2019 production forecast by 40 tb/d to an average of 11.8 mb/d with average production expected to breach the 12 mb/d mark during Q419 making it the top oil producer in the world. On the demand front, the agency lowered 2018 expected demand by 60 tb/d but increased 2019 demand outlook by 10 tb/d.
Oil Prices
Crude prices witnessed extreme volatility during Jun-18 led by several key events during the month. The market kept a close eye on OPEC discussions aimed at raising output against a backdrop of US imposed sanctions on Iran. While at the same time the US-China trade war was being played threatening a global economic recovery that was often touted to revive oil demand. However, despite the decision to raise output, oil prices surged in consecutive sessions led by supply disruptions reported in key oil producing centers namely Libya as well as Iran sanctions. Average prices of Brent and OPEC crude declined for the first time in four months. Brent spot crude closed at a monthly peak of $77.44/b and averaged at $74.4/b for the month, a decline of 3.5% as compared to the previous month average. OPEC crude also declined but at a slightly lower pace of 1.2% to average at $73.22/b while Kuwait crude almost maintained the previous month average of $72.38/b.
Meanwhile, in its short term energy outlook, the US EIA said that gasoline demand in the US is set to decline for the first time in six years in 2018 by almost 10 tb/d compared to 2017 with overall consumption forcasted at 9.31 mb/d during the year. For 2019, gasoline demand in the US is expected to increase marginally to 9.36 mb/d, a decline of 0.02 mb/d from the previous expectation. In addition, aAccording to EIA’s latest weekly report, US crude oil inventory declined by 12.6 million barrels during the week ended 6-July-18, the largest draw in almost two years, sending crude inventory to its lowest since February-15. The drop came after three consecutive weeks of gains led by pressure on US allies to conform to Iran sanctions. The decline also came as a result of a decline in flows from Canada due to an outage at its Syncrude facility. The EIA report came a week after API reported a drop of 6.8 million barrels in US crude oil inventories. In terms of rig count, US continued to add oil rigs with an increase of five rigs to report 863 rigs for the week ended 6-July18. Canada also added 10 rigs during the week to reach a total of 182 rigs.
World Oil Demand
World oil demand growth estimates for 2018 was kept unchanged from previous month at 1.65 mb/d to average at 98.85 mb/d, although there were revisions within the regions. These internal adjustments in demand figures included upward revision in demand from OECD region by around 0.1 mb/d in Q1-18 led by better-thanexpected data from OECD Americas, especially from the US for light and middle distillate products supported by healthy petrochemical sector and positive developments in industrial activities. Monthly data for oil demand in the US showed an increase of 0.38% for April-18, while preliminary data for May-18 and June-18 suggested robust growth in demand as compared to the previous year. For OECD Europe, oil demand data for April-18 suggested a y-o-y growth of 0.1 mb/d, while early indications for May-18 showed decline in demand in Germany, France, Italy and the UK. Downward revisions were done in the non-OECD space by around 0.1 mb/d in Q2-18 led by lower-than-expected demand from Latin America and the Middle East. A nine-day strike by truckers in Brazil affected demand in Latin America while slower construction activities and subsidy reduction policies in the Middle East resulted in lower demand during the quarter.
In its latest monthly report, OPEC also published its initial projections for 2019. According to the report, world oil demand in 2019 is expected to grow by 1.45 mb/d as compared to 1.65 mb/d expected in 2018 and breach the 100 mb/d mark to reach 100.3 mb/d in 2019 led by steady growth in global economies. OECD oil demand is expected to grow by 0.27 mb/d led by higher demand from OECD Americas owing to higher demand for NGL and middle distillates. Demand in Europe is expected to see growth, although at a lower pace, while the OECD Asia Pacific countries are expected to see a decline in oil demand owing to the planned substitution programmes. For the nonOECD countries, demand growth is expected to remain better than their OECD counterparts at around 1.18 mb/d, although the y-o-y growth in demand would be less than the 1.25 mb/d expected in 2018. Higher demand in 2019 is expected to come from Latin America and the Middle East regions that would be offset by a slight decline in oil demand growth in China.
World Oil Supply
Non-OPEC supply growth projections for 2018 was once again revised upward by 0.18 mb/d to a growth of 2.0 mb/d and is expected to average at 59.54 mb/d. The upward revision primarily reflected higher supply from the US, in addition to an expected increase in supply from Russia during 2H-18. Supply from OECD was revised downward by 71 tb/d and is now expected to grow by 1.88 mb/d to average at 27.57 mb. Supply from OECD Americas was revised upward by 95 tb/d with higher supplies from the US and Canada partially offset by a decline in supply from Mexico. For OECD Europe, supply forecast for 2018 was lowered by 0.02 mb/d, as compared to the previous forecast due to extended outages during maintenance during May-18 and June-18.
Non-OPEC oil supply in 2019 is expected to grow at broadly the same pace as in 2018 at around 2.1 mb/d. The increase is expected to come from higher production in North America and new project ramp up in Brazil partially offset by declines in Mexico, Norway and China led by lack of new projects and decline in productivity of mature fields. As per the report, the rate of growth of shale oil production is expected to slow down in 2H-18 that would continue into 2019 as the Permian basin faces take-away capacity constraints. In addition, some of the planned pipeline capacity additions have been delayed. Furthermore, rig count and well completions could see a slowdown coupled with a decline in well productivity as operators expand production beyond the current sweet spots. OPEC NGL production is expected to grow by 0.11 mb/d in 2019, a marginal decline from 0.12 expected in 2018.
OPEC Oil Production & Spare Capacity
OPEC production during June-18 remained almost flat after it reported a marginal increase of 30 tb/d to reach 31.83 mb/d, according to Bloomberg while according to OPEC secondary sources, the m-o-m increase was 173.4 tb/d. During June-18, Republic of Congo was added as the 15th member of the OPEC group with a production level of 331 tb/d, according to data from OPEC secondary sources, thereby increasing OPEC production to 32.2 mb/d for June-18, resulting in a m-o-m increase of 40 tb/d. During the month, Saudi Arabia increased production by 330 tb/d after the OPEC meeting in which it was decided to raise OPEC and non-OPEC output by 1 mb/d, which is 1% of total global oil production, to offset the decline in production from Iran due to sanctions. The increase in production would come by way of lowering the compliance level as per the production cut agreement to 100%. Moreover, this increase would also include an increase of 200 tb/d from Russia, according to a statement from Russia’s Energy Minister.
Saudi Arabia produced at a rate of 10.3 mb/d during June-18, the highest production in 18 months. However, this increase was almost fully offset by a steep decline of 0.3 mb/d in production from Libya that produced at the lowest pace since April-17. That said, according to recent reports, production in Libya is set to be restored after the NOC said that it would lift the force majeure on a number of major export terminals and resume shipments from the country. According to the estimates, around 0.7 mb/d of oil could be back in production.
Production in Angola also declined by almost 120 tb/d owing to technical problems in the country’s maturing oil fields although there are plans to boost output by 250 tb/d by 2020 by attracting international oil majors through new energy legislations and more favorable investment terms.
Countries that reported higher oil production during June-18 included Nigeria (+60 tb/d), Kuwait, (+50 tb/d) while Venezuela reported a decline (-60 tb/d). Venezuela, which continues to face economic woes, is reported to have 26 operational oil rigs, down 23 rigs y-o-y, a new 15year low for the country. Meanwhile, in Nigeria, oil exploration companies are now returning to existing fields to extract more oil as a counter to declining investments in new oil wells.