OPEC+ deeper oil output cuts support prices in December

US-China trade deal gives hope for oil demand

Report prepared by KAMCO

Research

Oil prices reached a 3-month high after OPEC+ members agreed on deeper cuts in the meeting held during the first week of December ‘19. The group agreed to cut output by a further 0.5 mb/d in Q1-20, taking the total targeted curbs to 1.7 mb/d. Around 0.7 mb/d of cuts would be shared between Saudi Arabia and Russia at 0.4 mb/d and 0.3 mb/d, respectively, as communicated by their energy ministers. The Saudi minister said that the Kingdom would voluntarily cut an additional 0.4 mb/d above its quota which, along with compliance from other producers, which would help to increase cuts to around 2.1 mb/d.

A weekend ‘phase one’ deal between the US and China pressed the brakes on new tariffs that was set to be implemented on Dec 15, 2019 and provided a much-needed hope to the oil market. As per the deal, the US agreed to waive off new tariffs and in return China agreed to import US agricultural produce and other products. Meanwhile, the impact of the delayed trade deal was seen in China’s November ‘19 export figures that showed a decline for the fourth month in a row. On the other hand, US jobs data was upbeat for November ‘19, and the US Fed signaled no change in rates in 2020 affirming steady economic growth next year. This, in addition to next year’s US elections and with no confusion on Brexit after the elections, should keep oil demand steady. Meanwhile, an unexpected inventory build in the US led by higher gasoline and distillate stocks during the week ended Dec 6, 2019 partly offset the positive oil price trend. The weekly EIA report showed an increase of 822,000 barrels after declining by 4.9 million barrels during the previous week. Previous weekly data shows that US crude inventory has increased in 11 out of the last 13 weeks adding an aggregate increase of around 31.9 million barrels to total US crude inventory which stood at 447.9 million barrels. The EIA report also highlighted the steep decline in gasoline consumption that reached 8.8 mb/d, the lowest level since February ‘19. This also prompted refineries to curb utilization rates that fell by around 130 bps to 90.6% of total installed capacity.

On the supply side, the US EIA’s latest Short Term Energy Outlook highlighted that the US will continue to produce at record pace next year, but the pace of growth would be less than previously expected. According to the report, US crude oil production is expected to reach 13.18 mb/d next year, showing an increase of 930 tb/d as against a growth expectation of 1 mb/d in the previous report. Production estimate for 2019 was also lowered to 12.25 mb/d from 12.3 mb/d in the previous report. OPEC, in its monthly report, was also confident of a supply cut impact next year that could result in a deficit. In its latest monthly report, the OPEC also said that the US shale producers have slowed down production more rapidly than previously expected and that global trade slowdown is expected to have bottomed, which would be positive for oil demand next year, a point seconded by the IEA in its monthly report.

Oil Prices

OPEC crude prices reached a 3-month high of USD 65.66/b on Dec 10, 2019 after the OPEC+ producers announced deeper cuts in Q1-20. Prices were up for six consecutive sessions aggregating to a gain of 5.1% for OPEC crude. A similar trend was seen in Brent crude prices that reached USD 67.88/b by Dec 12, 2019. The ‘phase one’ deal announced between the US and China over the weekend brings hope for higher demand over the coming years. In addition, a number of estimates released last week largely pointed to a favorable global economic growth next year that would support demand growth and oil prices. Average oil prices for November ‘19 saw the biggest gains since April ‘19, as the market contemplated deeper cuts from OPEC as well as the outcome of the trade talks. Brent crude traded above the USD 60/b during November ‘19 and averaged at USD 63.1/b, recording a m-o-m gain of 5.7%. Average OPEC crude prices witnessed a slightly lower gain of 5.1% to average at USD 62.9/b while Kuwait crude witnessed a gain of 5.3% to average at USD 63.7/b.

The IEA, in its latest monthly report, lowered global oil production growth forecast for next year by 0.2 mb/d to 2.1 mb/d but said that despite the additional OPEC cuts in Q1-20, global oil inventories are expected to rise during the quarter. The agency attributed the downward revision to the announced additional OPEC cuts in addition to lower production growth numbers expected for the US, Ghana and Brazil. On the positive side, the report painted a positive picture for global economic growth next year and stated that the slowdown in trade and economic activity may have come to an end in the last quarter of this year. Meanwhile, the EIA monthly report highlighted falling rig count in the US that led to slowdown in oil production growth and said it is expected to continue in 2020, although improving rig efficiency and well-level productivity has offset some of the impact of lower rig count.

World Oil

Demand

World oil demand growth expectations for 2019 was kept unchanged in OPEC’s latest monthly report at 0.98 mb/d with demand expected to average at 99.80 mb/d. Aggregate demand growth numbers for both the OECD and the non-OECD regions were also left unchanged. Monthly demand trend in the US remained subdued during November ‘19 especially for gasoline due to shrinking demand that reached the lowest level since February ‘19 led by fuel substitution and fuel efficiencies coupled with declining light vehicle sales. On the other hand, higher demand for NGL/ LPG, jet/kerosene and distillate more than offset the slowdown seen in gasoline and to some extent residual fuel oil. A similar trend was seen in oil demand data for Canada and Mexico which recently reported softer demand for gasoline . Oil demand trend for the OECD Europe region has remained positive so far this year as compared to 2018 with y-o-y gains of around 0.6%.

The October ‘19 demand numbers were positive for Germany, France and Italy that were partially offset by a decline in demand from the UK. In terms of product category, demand strengthened for gasoline, jet/kerosene and diesel for the transportation, industrial and residential sectors partially offset by decline in LPG, naphtha and residual fuel requirements. In the OECD Asia Pacific region, preliminary demand data for Japan showed declines during October ‘19 for all the product categories. On the non-OECD front, oil demand continued to remain strong in China rising by 0.35 mb/d y-o-y in October ‘19 primarily led by higher requirements for jet/kerosene, naphtha and diesel. A declining demand for gasoline partially offset the aforementioned growth. Vehicle sales continued to decline during October ‘19 falling by 4% y-o-y as rising SUV sales failed to offset decline in other categories. Oil demand numbers for India showed a decline during October ‘19 due to fall in demand for middle and heavy distillates that was partially offset by increase in LPG requirements.

Oil demand growth projections for 2020 was also left unchanged at 1.08 mb/d with demand expected to reach 100.88 mb/d. OECD demand is expected to increase by 0.07 mb/d while non-OECD demand is expected to increase by 1.01 mb/d primarily led by higher requirements from China.

World Oil Supply

According to preliminary data, world oil supply witnessed a m-o-m growth of 0.41 mb/d during November ‘19 and averaged at 99.78 mb/d. The increase in production came primarily on the back of higher production in the US, Canada, Norway, the UK, Russia, Azerbaijan and OPEC NGLs. OPEC’s market share declined by 30 bps m-o-m to 29.6% during November ‘19.

For the full year 2019, non-OPEC oil supply growth forecast was kept unchanged at a growth of 1.82 mb/d with total supply expected to average at 64.30 mb/d. However, regional revisions were made to demand data for the year with higher-than-expected oil production data for Thailand (+18 tb/d) and Russia (+3 tb/d) was fully offset by downward revisions to supply figures for the UK (-14 tb/d), Indonesia, India and Canada.

Quarterly upward revisions for oil supply from the US was made for Q3-19 but this was offset by a downward estimate for the last quarter of the year. The declining trend in oil rigs in the US also supported the revised supply numbers. Nevertheless, after declining for seven consecutive weeks in a row, US oil rig count increased by 4 in the latest weekly report from Baker Hughes to reach 667 oil rigs.

For 2020, non-OPEC supply growth was also left unchanged at 2.17 mb/d with oil supply during the year expected to reach 66.46 mb/d. There were upward revisions to supply data for the UK (+14 tb/d), Indonesia, India and Canada but these were offset by downward revisions for Russia (-18 tb/d) and Thailand.

OPEC Oil Production & Spare

Capacity

OPEC production once again declined during November ‘19 after the recovery bounce seen during the previous month. According to Bloomberg data, OPEC production declined by 110 tb/d during the month on the back of lower production mainly in Angola (-60 tb/d) and Iran (-40 tb/d) that was partially offset by a gain in production mainly in Ecuador and Iraq totaling 80 tb/d. Excluding the steep fall in production during September ‘19 due to the attacks on Saudi oil facilities, production in November ‘19 was the lowest in six years, according to Bloomberg data.

Continued on Page 22