Chronic oversupply as Libya output reaches 4-year high
KAMCO OIL MARKET REPORT
Crude prices reached the lowest in 7-months during the last week of June-17 on persistent oversupply concerns and a bulging inventory. Data on rising oil output from Libya and Nigeria showed the oil glut worsening as the OPEC members expanded output post coming out of disruptions that curbed output overthe past several years. Libya reportedly raised its oil output to a 4-year high level of 1.005 mb/d after the country’s largest oil field resumed production. Meanwhile, although Nigeria has ramped up output recently on its way to 2 mb/d mark, the shutdown of a prominent pipeline has affected the shipment of Bonny light crude since Thursday by almost 160 tb/d, disrupting output recovery in the country.
Nevertheless, there were also bullish factors in the market recently. Kuwait’s OPEC Governor has said that oil inventories are seen falling at a faster pace during 2H-17 as demand increases and OPEC members increase their compliance to production cuts. Moreover, a recent report showed that initial signs of oil market rebalancing has been spotted in the US where MidAtlantic gasoline supplies are now more than 5 million barrel less than a year ago, reportedly due to lower volumes from Europe that are now being used to meet domestic demand instead of exports.
Also, in its Short Term Energy Outlook, the US EIA reported that low oil prices have affected production in the US as against previous expectations that the US can manage to pump greater quantities of oil at the current level of prices. In addition, the IEA in its monthly report said that although supply was rising, demand is climbing faster than initially estimated.
In its first outlook for 2018, OPEC has hinted at a slower than expected ramp-up in oil demand and growth is estimated to be slightly less than 2017 but in line with the five-year average growth. On the supply side, OPEC expects 2018 supply to grow by 1.14 mb/d, a 43% increase as compared to the growth in 2017, with US being the primary factor for this increase, although its output is expected to be marginally affected by cost inflation and a decline in well productivity. The net effect is expected to result in a delayed rebalancing in the oil market.
Average oil prices declined for the second consecutive month witnessing the biggest decline in seven months. OPEC crude dropped 8.1%, while Brent and Kuwait crude declined by 8.0% and 8.8%, respectively. In terms of monthly average oil production, Bloomberg data as well as OPEC secondary sources point to higher OPEC output in June-17 primarily on the back of higher output in Saudi Arabia and Libya.
The month also saw Equatorial Guinea being added as the 14th member of the OPEC with a production rate of 150 tb/d in June-15. As expected in our May-17 monthly report, there are growing indications that Libya and Nigeria would be asked to cap their productions in the next OPEC meeting in order to restrict the group’s total output. KAMCO Research estimates output cuts of close to 2 mb/d by year end by OPEC + non-OPEC, including expected cuts imposed on exempted members in OPEC.
Oil traded mostly below USD 45/b during June-17 only to trend up from the last week of the month on the back of reports of inventory drawdowns in the US. Crude prices reached the lowest level since November-16 after reports of oil glut worsening on the back of higher output from Libya and Nigeria. Average OPEC crude prices also dropped for the second consecutive month to reach USD 45.2/b declining by 8.1% to reach the lowest in seven months.
The rally in oil prices seen during the last week of June-17 was on the back of higher-than-expected drawdown of refined products in the US and lower-than-expected increase in crude inventories. Data for the first week of July-17 also pointed to similar drawdowns. According to the weekly inventory data from EIA, US crude inventories dropped the most in 10 months by 7.6 million barrels last week as against much lower expectations. API pointed to a similar decline of 8.1 million barrel. Nevertheless, lackluster growth in demand for US gasoline dented the impact of lower inventories. That said, the expected pick up in the price elastic gasoline demand in the upcoming summer driving season are expected to support prices gasoline and crude. Furthermore, the latest rig count data from Baker Hughes showed an increase of seven oil rigs during the last week of June-17 to reach 763 active rigs after dropping for the first time in almost six months in the week before.
Meanwhile, IEA upgraded its oil demand growth forecast for 2017 by 0.1 mb/d which is now expected to reach 98 mb/d followed by an increase of 1.4 mb/d in 2018 to reach 99.4 mb/d. OECD stocks continued to decline with the gap from five-year average declining to 266 million barrel as compared to 300 million barrel a month before. The report also said that quarterly global demand growth for oil strengthened during Q2-17 emerging from a weak Q1-17 to reach 1.5 mb/d on the back of stronger yearon-year growth in the OECD countries and in developing countries.