Oil prices re­cover from US hur­ri­canes im­pact

KAMCO Oil Mar­ket Monthly Re­port

Kuwait Times - - BUSINESS -

Oil prices re­mained steady dur­ing Septem­ber-17 with OPEC crude record­ing a gain of 6.4 per­cent dur­ing the first week backed by lower-than-an­tic­i­pated im­pact of hur­ri­canes Har­vey and Irma in the US. Other fac­tors that sup­ported prices in­cluded the on­go­ing dis­cus­sion to ex­tend the OPEC oil pro­duc­tion cut agree­ment be­yond the cur­rent dead­line of March-18 as well as a weak USD that hit a more than 2.5 year low against euro and multi-month low against a bas­ket of cur­ren­cies af­ter it emerged that a third Fed rate hike for the year may not hap­pen ow­ing to weak in­fla­tion and slow growth.

The twin hur­ri­canes in the US have led to higher crude in­ven­to­ries, as seen from API and EIA re­ports. Re­fin­ery uti­liza­tion fell to the low­est since 2010 on the Gulf Coast fol­low­ing Hur­ri­cane Har­vey. More­over, the im­pact of Hur­ri­cane Irma on oil de­mand in Florida is ex­pected to be less than that in Texas that was hit by the first hur­ri­cane dur­ing the last week of Au­gust-17. That said, oil pro­duc­tion is also said to have de­clined in the US as seen from the de­cline in rig count data. This was re­flected in EIA’s pro­duc­tion out­look that low­ered pro­duc­tion forecast for the US by 1 per­cent and 0.7 per­cent for 2017 and 2018, re­spec­tively. On the de­mand side, the im­pact of the hur­ri­canes is ex­pected to af­fect US oil de­mand, how­ever, with re­duced sup­ply from shale pro­duc­ers as well as re­fin­ery out­ages, the neg­a­tive im­pact of slower de­mand on oil price was lim­ited.

On the other hand, there has been grow­ing con­sen­sus amongst OPEC pro­duc­ers that the on­go­ing oil pro­duc­tion cut agree­ment can be ex­tended if it is re­quired to bal­ance the oil mar­ket. Ac­cord­ing to re­ports, oil min­is­ters of Saudi Ara­bia, Venezuela, Kaza­khstan and UAE are on the same page on keep­ing all op­tions open to re­bal­ance the oil mar­ket. OPEC pro­duc­tion de­clined marginally to 32.71 mb/d dur­ing Au­gust-17 pri­mar­ily due to a steep de­cline in pro­duc­tion in Libya and mar­ginal de­cline in Saudi Ara­bia with its pro­duc­tion now be­low 10 mb/d, while Nige­ria raised its pro­duc­tion by 40 tb/d. The dis­rup­tions in Libya af­fected the coun­try’s largest oil­field that stopped pro­duc­ing for two weeks.

Mean­while, OPEC’s monthly re­port gave an op­ti­mistic view on oil de­mand and sup­ply. OPEC fore­casted higher de­mand in 2018 cou­pled with a mar­ginal de­cline in sup­ply as com­pared to its pre­vi­ous fore­casts. The re­port also high­lighted crude price back­war­da­tion for the first time since 2H-14 as a re­sult of higher de­mand for im­me­di­ate de­liv­ery ex­press­ing hope that the mar­kets is ex­pected to re­bal­ance over the next year with a ma­jor de­cline in in­ven­to­ries. KAMCO Re­search ex­pects oil de­mand in the US to de­cline in the near term due to the two hur­ri­canes, which is also ex­pected to af­fect US eco­nomic growth for the Q3-17. Crude in­ven­to­ries in the US are re­port­edly up, which we be­lieve would af­fect global oil prices in the near term even if re­fin­ery ca­pac­ity is back on­line at a fasterthan-ex­pected pace.

Crude oil traded in a tight range in Au­gust-17 and weak­ened to­wards the end of the month af­ter Hur­ri­cane Har­vey hit the US Gulf Coast af­fect­ing re­fin­ery op­er­a­tions and its likely fall­out in terms of crude oil de­mand and in­ven­to­ries. Ac­cord­ing to re­ports, re­fin­ery uti­liza­tion went down to the low­est since 2010 and as a re­sult crude in­ven­to­ries surged 4.6 mil­lion bar­rels while gaso­line stocks fell by 3.2 mil­lion bar­rels for the week ended 1-Septem­ber-17. In terms of prices, gaso­line prices surged to 2-year highs due to the risk of fuel short­ages, while gaso­line fu­tures de­clined. The ex­pected sever­ity be­fore the sec­ond hur­ri­cane also af­fected oil prices, how­ever, the real im­pact was much less than an­tic­i­pated re­sult­ing in oil prices gain­ing af­ter the hur­ri­cane ac­tu­ally hit the coast. Oil prices also firmed af­ter key re­finer­ies in the US started com­ing on­line.

Nev­er­the­less, the likely im­pact on de­mand is not very clear as storms have a ten­dency to limit travel in ad­di­tion to many ve­hi­cles be­ing ren­dered faulty af­ter the event.

Mean­while, US oil rig count con­tin­ued to de­cline and is now down in five out of the last eight weeks. Ac­cord­ing to Baker Hughes, rig count fell by 3 to 756, the low­est in 11 weeks, for the week ended 8-Septem­ber-17. Oil rigs have also de­clined in­ter­na­tion­ally. Ac­cord­ing to monthly data, in­ter­na­tional rig counts, ex­clud­ing US and Canada, de­clined by eight to 715 dur­ing Au­gust-17 pri­mar­ily due to sub­dued oil prices that con­tin­ues to af­fect driller’s prof­itabil­ity.

Av­er­age crude prices dur­ing Au­gust-17 strength­ened across the cat­e­gories. Av­er­age OPEC crude prices were up 5.7 per­cent to reach $49.6/b while Kuwait and Brent crude prices went up 5.4 per­cent and 6.5 per­cent, re­spec­tively. The pos­i­tive trend con­tin­ued in Septem­ber-17 with OPEC crude record­ing gains since the start of the month and was up more than 6 per­cent by 8-Septem­ber-17. Brent crude also surged and reached a 5-month high level of $53.63/b in Septem­ber-17.

World oil de­mand growth pro­jec­tions for 2017 was once again up­graded in the lat­est OPEC monthly re­port to 96.77 mb/d. De­mand is now ex­pected to grow by 1.42 mb/d in 2017 af­ter an up­ward revision of 50 tb/d pri­mar­ily on the back of bet­ter-than-ex­pected de­mand from OECD Amer­i­cas and Europe dur­ing Q2-17. Quar­terly de­mand data for OECD Amer­i­cas was re­vised up­wards by 100 tb/d for Q2-17 mainly re­flect­ing strong de­mand dur­ing June-17 led by gains in trans­porta­tion and in­dus­trial fu­els, par­tic­u­larly gaso­line, jet fuel, gas diesel oil and LPG. How­ever, Q317 de­mand data was low­ered by 40 tb/d ow­ing to the dis­rup­tions re­lated to the hur­ri­canes. Mean­while, im­prov­ing eco­nomic con­di­tions in OECD Europe cou­pled with in­creas­ing ve­hi­cle sales and the ex­ist­ing low oil price en­vi­ron­ment re­sulted in an up­ward ad­just­ment to de­mand data by 100 tb/d for Q2-17 and 40 tb/d for Q3-17. For the non-OECD coun­tries, de­mand was re­vised down marginally by 7 tb/d for 2017 de­spite some up­ward ad­just­ments, in­clud­ing 33 tb/d for China that was led by higher-thanex­pected de­mand in petro­chem­i­cal (higher LPG de­mand) and trans­porta­tion sec­tors. The down­ward ad­just­ment for the non-OECD group pri­mar­ily re­flected slower-thanex­pected oil de­mand de­vel­op­ments in In­dia due to the af­ter­ef­fects of the de­mon­e­ti­za­tion pol­icy. In the Mid­dle East, oil de­mand in Saudi Ara­bia in­creased for the first time in three months dur­ing July-17 by 0.14 mb/d to 2.8 mb/d due to higher fuel oil de­mand cou­pled with in­crease in de­mand for trans­porta­tion fu­els and crude burn­ing for power gen­er­a­tions. Global oil de­mand growth ex­pec­ta­tions for 2018 was also re­vised up by 70 tb/d to an av­er­age growth of 1.35 mb/d to a to­tal con­sump­tion of 98.12 mb/d. Higher de­mand in 2018 is ex­pected to be driven by higher con­sump­tion in OECD Europe and China. The con­tin­ued im­prove­ment in eco­nomic growth in Europe is one key fac­tor for the revision, while the ex­pan­sion in the petro­chem­i­cal and trans­porta­tion sec­tors in China is ex­pected to re­sult in higher de­mand for trans­porta­tion and in­dus­trial fu­els that would be par­tially off­set by emis­sion norms and fuel sub­sti­tu­tion with nat­u­ral gas. De­mand in OECD Asia Pa­cific was also up­graded slightly by 10 tb/d due to ex­pec­ta­tions of im­prov­ing econ­omy.

World Oil Sup­ply

Global oil sup­ply dur­ing Au­gust-17 wit­nessed a mon­thon-month de­cline of 0.41 mb/d and av­er­aged at 96.75 mb/d, ac­cord­ing to pre­lim­i­nary data, with non-OPEC sup­ply de­clin­ing by 0.32 mb/d to av­er­age at 57.68 mb/d dur­ing the month. Ac­cord­ing to pre­lim­i­nary data, US pro­duc­tion from Gulf of Mex­ico and parts of Ea­gle Ford was dis­rupted af­ter Hur­ri­cane Har­vey, in ad­di­tion to lower out­put from North Sea and Kaza­khstan fol­low­ing sea­sonal main­te­nance. This de­cline was par­tially off­set by higher out­put from Canada, OECD Europe and Brazil. The share of OPEC out­put in de­clined by 10 bps to 33.8 per­cent fol­low­ing a de­cline in pro­duc­tion dur­ing the month. For the full year 2017, non-OPEC oil sup­ply growth ex­pec­ta­tion re­mained un­changed with an ex­pected growth of 0.78 mb/d to av­er­age at 57.80 mb/d as the up­ward revision in sup­ply from FSU was com­pletely off­set by down­ward revision in OECD Amer­i­cas. In terms of in­di­vid­ual coun­try data, sup­ply from Kaza­khstan was up­graded by 0.04 mb/d for 2017 while US oil sup­ply was low­ered by 0.07 mb/d fol­low­ing dis­rup­tions re­lated to Hur­ri­cane Har­vey. The monthly OPEC re­port also high­lighted ad­di­tional pro­duc­tion from start-up projects like Kasha­gan in Kaza­khstan along with higher rel­a­tively higher in­vest­ment in up­stream projects.

Non-OPEC sup­ply growth pro­jec­tions for 2018 was low­ered by 0.1 mb/d to 1.00 mb/d and is ex­pected to av­er­age at 58.80 mb/d. The down­grade revision pri­mar­ily re­flects lower oil sup­ply from Rus­sia and Kaza­khstan. OECD Amer­i­cas would be the big­gest con­trib­u­tor to sup­ply growth in 2018 as shale out­put is ex­pected to in­crease by 619 tb/d af­ter adding 0.5 mb/d in 2017.

OPEC oil pro­duc­tion & spare ca­pac­ity

OPEC oil pro­duc­tion de­clined in Au­gust-17 pri­mar­ily due to a de­cline in pro­duc­tion in Libya and Saudi Ara­bia par­tially off­set by higher pro­duc­tion pri­mar­ily in Nige­ria. Av­er­age pro­duc­tion rate for the group reached 32.71 mb/d, ac­cord­ing to Bloomberg, while OPEC sec­ondary sources showed a pro­duc­tion rate of 32.76 mb/d dur­ing the month. Oil pro­duc­tion by Saudi Ara­bia was low­est in three months as the King­dom slashed pro­duc­tion by 30 tb/d. On the other hand, the de­cline in Libya was pri­mar­ily due to force ma­jeure de­clared at sev­eral pro­duc­tion sites fol­low­ing dis­rup­tions. Ac­cord­ing to the Libya’s cen­tral bank, the dis­rup­tions re­sulted in an av­er­age daily loss of 0.35 mb/d fol­low­ing the shut­down of Sharara oil­field. As a re­sult of the de­cline in monthly pro­duc­tion rate, OPEC com­pli­ance to the pro­duc­tion cut agree­ment reached 89 per­cent in Au­gust-17, ac­cord­ing to Reuters. UAE and Iraq, that were un­der pres­sure from the group to ad­here to their share of pro­duc­tion cuts, have stated higher com­pli­ance to the agree­ment dur­ing Au­gust-17. In terms of ex­tend­ing the pro­duc­tion cut agree­ment, Kuwait Oil Min­is­ter Es­sam AlMar­zouq was quoted as say­ing that the de­ci­sion to ex­tend the agree­ment would be clear by Novem­ber-17. While stat­ing that OPEC’s strat­egy in go­ing ahead in the right di­rec­tion he said that oil prices are ex­pected to range be­tween $50 - $55 a bar­rel through year-end backed by ex­pec­ta­tions of stronger de­mand in Q3-17 and a higher-thanex­pected drop in in­ven­to­ries. In its ef­fort to limit crude sup­ply, Saudi Ara­bia said it would cut crude al­lo­ca­tions to its cus­tomers by 0.35 mb/d in Oc­to­ber-17 de­spite see­ing healthy and ro­bust de­mand and re­fin­ing mar­gins in Asia. Aramco is said to re­duce flows to Asia by 1.8 mb/d in Oc­to­ber-17, af­fect­ing pri­mar­ily its cus­tomers in Ja­pan. In ad­di­tion, UAE’s ADNOC has also pledged to curb Oc­to­ber17 crude sup­plies by 10 per­cent across the three grades of oil it sup­plies.

On the other hand, Iran said it would achieve a pro­duc­tion rate of 4.5 mb/d within the next five years as com­pared to its cur­rent pro­duc­tion rate of 3.8 mb/d and crude ex­ports are ex­pected to reach 2.5 mb/d. The said in­crease in out­put is planned to come from ad­di­tional 0.42 mb/d from the West Karoun oil field plus 0.28 mb/d from oil fields in cen­tral and south­ern Iran as well as the Falat Ghare oil com­pany.

World oil de­mand

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