Near-term outlook remains bullish on higher oil demand

Saudi-Russia talks fail to show direction

KUWAIT: Oil had one of the longest running positive streaks in Sept-17 with spot Brent crude reaching almost $60/b, the highest level since July-15. The run-up came on the back of improving outlook for oil demand coupled with the ongoing destocking in the US. That said, price trend in Oct-17 turned negative after Hurricane Nate’s impact was less-than-expected and reports that US crude production reached 9.56 mb/d in Sept-17. In addition, the reported rise in US oil exports to a record of nearly 2 mb/d also fanned concerns about continuing oversupply in the market. The second week saw high volatility but prices trended higher underpinned by strong Chinese oil imports (9 mb/d in Sept-17) along with the ongoing Iran and US tensions that threatens the pace of production revival in Iran, in addition to the unrest in Iraq.

On the other hand, the ongoing talks between Russia and Saudi Arabia have failed to show direction on whether the ongoing production cut agreement would continue beyond the March-18 deadline, although the probability of an extension remains high considering its impact on the oil market and expectations of faster rebalancing. On the positive side, OPEC chief signaled that they are looking to expand the production cut deal to include other producers and urged US shale producers to join the efforts to rebalance the oil market.

Meanwhile, recent forecasts have pointed to a stronger oil demand in 2018, although production is expected to increase as well. The US EIA, in its latest Short Term Energy Outlook, has raised the US oil demand growth projection for 2018 by 20 tb/d, while lowering its 2017 forecast by 120 tb/d. On similar lines, the IEA had a positive undertone in its monthly report where it expects to see steady oil prices in 2018 on rising demand, partially offset by rising non-OPEC supply. The agency lauded OPEC and other non-OPEC producers for the production cuts but said that 2018 would require continued discipline as demand is expected to grow at the same pace as supply from outside the group.

OPEC also boosted its oil demand outlook by 30 tb/d for both 2017 and 2018 backed by a strengthening global economy coupled with weaker supply from non-OPEC producers. Nevertheless, production data showed higher month-on-month output in September-17 that reached 32.7 mb/d, almost 50 tb/d more than the previous month, according to OPEC’s secondary sources. Bloomberg data also suggested an increase of 120 tb/d led by higher production in Saudi Arabia, Kuwait and Libya partially offset by marginal cuts primarily by Iraq and Algeria.

Oil prices

Crude oil prices had one of the longest running positive streaks during September-17 with OPEC crude declining merely on four trading sessions and reaching a peak of 56.43/b, the highest since July-15. A growing consensus among oil producers that the market is expected to rebalance in 2018 provide the much needed positive boost to the market. A weak USD also provided support to prices during the month. On the other hand, the ongoing political events in Venezuela, Iraq (Kurdistan) and Libya has held prices higher, although it is not considered as a permanent support. However, during October-17, oversupply concerns started resurfacing, which along with profit taking from higher prices and record US exports numbers, resulted in prices receding from more than 2-year higher levels. In addition, API reported an increase of 3.1 million barrels in US crude stocks as against analyst consensus of a decline of 2 million barrels. On the other hand, the EIA, in its Short Term Energy Outlook, maintained a positive tone and said that expenditure on heating fuels is expected to rise this winter season due to colder-than-expected weather.

The higher oil prices during September-17 also led to higher rig count in the US with a reported increase of six rigs during the last week of the month. Nevertheless, the count was down by 2 and then 5 during the first two weeks of October-17. Also, Baker Hughes’ monthly rig count data showed that international rig count dropped by 21 to 931 rigs during September-17, while US rig count was down by 7. Average crude prices during September-17 strengthened across the categories and topped the highest level since July-15 . Average OPEC crude price was up 7.7 percent to reach $53.4/b, while Kuwait crude was up 7.2 percent. Brent crude prices saw an even stronger surge of 8.5 percent during the month. The positive trend continued in October-17 with all the three crude categories recording a surge of almost 1 percent as compared to September-17 levels.

World oil demand

World oil demand growth projections for 2017 was revised upwards for the third consecutive month in OPEC’s latest monthly oil report. The growth is now expected to reach 1.45 mb/d after an upward revision of 30 tb/d to 96.80 mb/d reflecting improving economic trends in OECD countries and higher demand from China. Demand from the OECD region was revised upward by 42 tb/d, led by better-than-expected demand data for Q2-17 across the OECD countries. The US recorded better-thanexpected oil demand growth during the quarter with transportation fuel demand revised upward by 100 tb/d during the quarter. Distillates accounted for the bulk of the strong demand, as per the latest available data for July-17, led by expansion of industrial activities coupled with LPG supplied to petrochemical industry, while demand for gasoline, jet/kerosene and naphtha remained largely flat. Nevertheless, gasoline demand is expected to pick-up in the remainder of 2017 and in 2018 on the back of positive trends in US vehicle market, especially the larger vehicles. Preliminary data for August-17 and September-17 also pointed out to continued strong demand for fuel products in the US. The OECD Europe region is also expected to post positive oil demand growth and despite some downside risks, the overall projection is dominated by positive factors. The first seven months of the year witnessed a demand growth of 0.28 mb/d backed primarily by road transportation and industrial fuels.

Meanwhile, Chinese demand till YTD Aug-17 has been strong (+0.34 mb/d) primarily led by rising jet fuel and gasoline consumption. Global oil demand growth expectations for 2018 was also revised up by 30 tb/d to 1.38 mb/d to a total demand of 98.19 mb/d. The upgrade was once again due to better economic growth globally, particularly in China and Russia. For the OECD Americas, the demand

growth was upgraded by 15 tb/d on the back of slightly better economic outlook as compared to the previous month. Industrial and road transportation fuel requirements are expected to be the main contributor of growth for the US as well as the OECD Europe region. The Asia Pacific countries within the OECD region are expected to slightly consume less oil in 2018 as compared to 2017. Outside the OECD region, India is expected to be a major growth contributor in 2018 with a projected y-o-y demand growth of 0.16 mb/d.

World oil supply

Global oil supply during September-17 witnessed a month-on-month upward revision of 0.41 mb/d and averaged at 96.50 mb/d, showing an increase of 1.08 mb/d as compared to September-16. Non-OPEC supply during the month accounted for the bulk of this increase at 0.31 mb/d and averaged at 57.65 mb/d. However, for the full year 2017, non-OPEC oil supply forecast was revised downward by 0.10 mb/d to average at 57.69 mb/d resulting in an expected growth of 0.68 mb/d. Changes for the full year reflected a lowered supply forecast for FSU, OECD Americas and Other Asia by 0.14 mb/d partially offset by an upward revision of 0.04 mb/d in supply from OECD Europe and Africa. In terms of individual country changes, supply from UK, Colombia, Azerbaijan, Congo and Brunei saw upward revision of close to 0.07 mb/d, while supply from Russia, Brazil and the US was lowered by approximately 0.13 mb/d. Quarterly supply expectations for the remainder of 2017 shows a supply rate of 58.28 mb/d during Q4-17, that is higher than the other quarters due to seasonal pattern coupled with the improving price environment that would trigger shale production in addition to start-up of giant projects like Kashagan, an increase in active rigs in North America and higher upstream investments. The OPEC monthly report added that key shale producers in the US are basing their production plans on a price of $50-55/b, despite a drop in drilling efficiency.

Non-OPEC supply growth projections for 2018 was once again lowered by 60 tb/d to 0.94 mb/d and is expected to average at 58.64 mb/d. The downgrade revision primarily reflects lower oil supply primarily from Russia.

OPEC production & spare capacity

OPEC production increased by 120 tb/d during September-17 to reach the year’s second-highest monthly production rate of 32.83 mb/d, according to Bloomberg data. The increase in production was primarily led by Saudi Arabia (+60 tb/d) and Kuwait (+50 tb/d), partially offset by marginal curbs in Iraq and Algeria totaling 40 tb/d. OPEC’s monthly report showed an increase of 88.5 tb/d in supply from OPEC during September-17 with secondary sources pointing at Libya and Nigeria as the key contributor to this growth. Despite adding almost 54 tb/d during the month to reach a production rate of 0.92 mb/d, Libya unable to reach its target production rate of 1.25 mb/d due to sporadic shutdowns at fields and ports in addition to budget constraints, as said by the Chairman of NOC. Also, the start of October-17 witnessed a twoday closure of the country’s largest Sharara oilfield that hampered production. Nevertheless, the reopening of Benghazi port and a new substation that would give Libya’s Sarir oilfield a production boost of 26 tb/d are expected to push production higher during October-17.

Meanwhile, Nigeria has voluntarily limited its oil production at 1.8 mb/d, and said that it continues to enjoy OPEC’s exemption for the production cut agreement.

According to a statement from Russia’s energy minister, OPEC is said to have achieved 100 percent compliance to the production cut deal after fully implementing the output cuts. However, the agreed upon cuts by individual countries is yet to be achieved and the overall compliance came after some countries cut more than their share of the deal. On the other hand, the compliance by non-OPEC producers was even higher at 119 percent in September-17 from 117 percent during the previous month, according to Bloomberg. In addition, according to IEA, total oil supply cut compliance was around 125 percent.

Furthermore, Saudi Arabia has announced a much smaller allocation for November-17, emphasizing its adherence to the production cuts. According to the official statement, despite a contracted demand of 7.7 mb/d, the Kingdom has assigned merely 7.2 mb/d for export. This also highlights a new emphasis on targeting exports rather than just production levels for a faster rebalancing of the market.

Global oil demand growth expectations for 2018 revised up