Oil prices remain high on pipeline shutdown
OPEC says output cut is pushing for a greater rebalancing
KUWAITR: Oil prices remained range-bound with minimal volatility and comfortably above the $60/b mark during November-17 and during the first two weeks of December-17 following the extension to the ongoing oil production cut agreement until the end of 2018. An oil pipeline shutdown in North Sea for repairs and maintenance after a leak also exerted upward pressure on Brent crude prices as the pipeline carries around 0.45 mb/d of Forties crude from the North Sea. The pipeline carries the biggest of the five North Sea crude oil streams and according to reports, it would take several weeks for the repair work to reach completion, and for the pipeline to come back online.
Oil price support also came after OPEC chief said that the ongoing output cut pact is pushing for a faster rebalancing of the oil market as inventory glut declined to 130 million barrels above the 5-year average.
This also triggered talks of an exit strategy to the pact but the OPEC chief said that the producers are working on a continuity strategy for adjusting supply beyond the existing agreement that runs until the end of 2018. He added that oil fundamentals continue to remain strong, and improving global economic growth would support higher oil demand in the future. However, Kuwait’s oil minister said that the producers may end their production cuts before 2019 if the market rebalances by June-18, highlighting the pressure from Russia to end the pact. On the other hand, energy ministers of UAE and Iraq said it was too early to speculate an exit strategy, and that OPEC plans to discuss this in its June-18 meeting.
Meanwhile, IEA, in its monthly report, kept global oil demand growth unchanged at 1.5 mb/d (+1.6 percent) for 2017 and at 1.3 mb/d (+1.3 percent) for 2018. In terms of OECD commercial inventory, IEA data suggested a drop of 40.3 million barrels in October-17 to reach 2.94 billion barrels, the lowest level since July-15 and 111 million barrels above the five year average. On non-OEPC supply, IEA lowered the forecast for 2017 from an expected growth of 0.7 mb/d in the previous report to 0.6 mb/d in the latest report. However, the agency raised supply forecast for 2018 by 0.2 mb/d to an expected growth of 1.6 mb/d primarily on the back of US shale producers also highlighting their flexibility in increasing output when prices are high. In addition, a pickup in US drilling activity and well completion rates would imply higher supply in the coming months. On a positive note, IEA forecasted a surplus global supply of 200 tb/d during 1H-18 that would revert to a deficit of 200 tb/d during 2H-18, resulting in a closely balanced market by year end.
With firming oil prices, US hydrocarbons production is not expected to slow down in the near future due to the growth of horizontal drilling and fracking. US oil rig count also increased for the 5th consecutive week rising by 2 to reach 751 rigs. This has resulted in US exporting the highest amount of hydrocarbons in its history backed by its pipeline and dock infrastructure. US shipped its excess refined products in the Midwest for filling the gap left by refiners in Latin America, in addition to customers in Europe and Asia.
Crude prices continued to surge during November-17 and December-17 following extension to the ongoing output cut agreement between OPEC and non-OPEC producers further supported by reports of faster rebalancing in the oil market. Spot crude prices remained comfortably above the $60/barrel mark for most of the November-17 and in the first two weeks of December-17 after reaching a daily peak of $62.07/barrel in the first week of November17, the highest level since June-15. Average Brent crude prices during November-17 reached the highest level in 36 months to $62.6/barrel recording a month-on-month increase of 9.3 percent while average OPEC crude reached the highest level in 30-months to $60.74/barrel, an increase of 9.4 percent as compared to average prices in October-17.
Meanwhile, EIA in its weekly inventory report for the week ended 8-December-17 reported an inventory draw of 5.1 million barrels to reach 443 million barrels, a seasonal average level. API also reported crude stock decline of 7.4 million barrels for the week ended 8-Dec-17 to reach 444.4 million barrels on the back of declining imports. This was the second consecutive week of inventory draw after API reported a 5.5 million drop in the previous week, although gasoline inventory saw a massive build of 9.2 million barrels during the same week. However, the enthusiasm from the EIA’s report was dampened by gasoline inventories that rose once again by 5.7 million barrels (similar to API’s expectations) as refineries produced at the rate of 10.1 mb/d of gasoline, up from 9.8 mb/d during the previous week.
Furthermore, in its short term energy outlook, the EIA raised Brent crude price forecast for 2017 and 2018 to $53.88/barrel and $57.26/barrel respectively, while raising US oil output forecast for 2018 by 60 tb/d to 10.02 mb/d, the highest average production level ever achieved in the US. The recent surge in oil prices is expected to provide motivation to US producers to add output. On the other hand, oil demand growth for 2018 was lowered by 40 tb/d to 1.62 mb/d by the EIA, although 2017 demand forecast was raised by 80 tb/d to 1.39 mb/d.
World oil demand
After seeing upward revisions for four consecutive months, world oil demand growth projections for 2017 were kept unchanged in the latest OPEC monthly oil report. The growth is expected to reach 1.53 mb/d to 96.94 mb/d primarily reflecting higher demand from Europe, China and Other Asia regions. In the US, data for September-17 showed a declining trend in oil demand as compared to September-16 due to weak gasoline demand while demand for diesel increased. However, preliminary data for October-17 and November-17 showed strong demand growth as compared to the previous year, resulting in a demand growth of 0.15 mb/d for the first eleven months of 2017. In the European region, oil demand remained strong in Germany, UK, France, Italy, Turkey, the Netherlands and Poland, as lower oil prices boosted demand from the transportation sector despite some offsetting factors. In the OECD Asia Pacific region, Japan reported weak demand trends for October-17 while South Korea saw strong increase in oil demand for the majority of petroleum product categories. September-17 data for Australia also showed bullish demand trends for oil. In the non-OECD region, China continued to see higher oil demand in October-17, although total demand growth projections for 2017 was kept unchanged. India also recorded demand growth in October-17, however, the growth was marginal as compared to the trends seen in the past few months. In the Middle East, oil demand declined sharply in Saudi Arabia in October-17 due to substitution effect as well as a decline in direct crude burning for electricity generation owing to seasonal factors. Global oil demand growth expectations for 2018 was also kept unchanged at 1.51 mb/d to a total demand of 98.45 mb/d. Economic growth and low price environment is expected to exert upward pressure on oil demand in the US while substitution effect, vehicle efficiencies and high baseline of 2017 are expected to counter the aforementioned positive factors. A similar trend is expected for European oil demand that has seen slight improvement as compared to the previous report as a result of healthy economic growth but the overall growth is expected to be lower than in 2017 as some positive factors are expected to fade away next year.
World oil supply
Global oil supply during November-17 witnessed a strong month-on-month increase of 0.84 mb/d and averaged 97.44 mb/d, showing an increase of 0.35 mb/d, as compared to November-16. Non-OPEC supply during the month accounted for the bulk of this increase at 0.98 mb/d and averaged at 64.99 mb/d. The full year 2017 oil supply growth forecast for non-OPEC producers was revised upward by 0.15 mb/d to average at 57.82 mb/d resulting in an expected growth of 0.81 mb/d. The revisions primarily came on the back of higher supply expectations from Russia (+0.09 mb/d) and from the US and Canada which showed higher-than-expected output in Q3-17, in addition to an upward revision to Mexico’s supply that is now expected to decline at smaller pace. On the other hand, supply forecast for Indonesia was lowered in the latest report, which partially offset the aforementioned upward revisions.
Non-OPEC supply growth projections for 2018 was also revised upward by 0.12 mb/d to 0.99 mb/d and is expected to average at 58.81 mb/d, primarily reflecting higher expected supply from the US that is now expected to report a supply growth of 1.05 mb/d. Supply from some non-OPEC countries were also raised by a total 0.99 mb/d; however, this growth was partially offset by 0.15 mb/d downward revision for Russia’s oil supply growth.
OPEC production & spare capacity
OPEC oil production continued to decline during November-17 as a majority of the producers reported a month-on-month drop in production. According to Bloomberg data, average OPEC production rate stood at 32.47 mb/d, the lowest level in the past six months, as compared to 32.55 mb/d in October-17, resulting in a decline of 80 tb/d in November-17. According to OPEC’s secondary sources, average production during the month stood at 32.45 mb/d with almost similar production declines reported by individual producers. Angola reported the biggest monthly drop in production by 100 tb/d to reach 1.61 mb/d followed by Kuwait and Saudi Arabia that curbed production by a total 90 tb/d. On the other hand, Iraq reported the biggest increase of 40 tb/d followed by Qatar that raised production by 30 tb/d. Saudi Arabia’s production was once again reported at below the 10 mb/d mark that helped, in addition to higher compliance by other members, to increase the overall OPEC compliance. It is believed that the compliance by OPEC and non-OPEC producers remained above 100 percent during Nov-17. That said, the shutdown of the Forties Pipeline System (FPS), which affected crude supplies to the tune of 0.45 mb/d, could result in lower compliance by OPEC producers as some producers, specifically Saudi Arabia and potentially Algeria, have undertaken additional production cuts than what is required. These producers can increase output without breaching their share of output cuts.
Meanwhile, despite pressure from other OPEC producers, Nigeria and Libya are signaling an output hike in 2018. According to reports, Total is expected to complete its $16 billion EGINA project in Nigeria in 2018. The field will have a capacity of 0.2 mb/d, or 10 percent of Nigeria’s production, and is expected to commence in Q4-18. On the other hand, Libya is also making efforts to raise additional funds that is limiting crucial repairs to its energy infrastructure.
KAMCO Research believes that the current surge in oil prices are led by temporary factors and any normalization in the near term, wherein the FPS is back online or there is a start to discussion on the exit strategy for the output cuts would put downward pressure on crude prices.