Oil markets remain in equilibrium
Buyers moved in as the price fell, but the IEA is forecasting the length to continue for at least another year
After a relatively stable month in September, crude prices rallied in early October on expectations of lower US production and rising tension in the Middle East. But by mid-October they had started to slide after the US government reported a larger-than-expected crude stockpile build.
The stock surge was a result of lower refining runs as US refiners shut for maintenance after the peak summer driving season. As
Petroleum Economist went to press, Brent was trading at $49.44/barrel, while WTI was lower at $46/b. A projected marked slowdown in demand growth next year and the anticipated arrival of additional Iranian barrels – should international sanctioned be eased – are likely to keep the market oversupplied through 2016, the International Energy Agency (IEA) said in its latest report.
For now, lower oil prices are bolstering strong demand growth. The world’s biggest consumers, the US and China, are buying more oil – boosting growth this year to a five-year high of 1.8m b/d, a jump on trivial gains of 500,000 b/d in the second quarter 2014 when the dollar price of oil was in triple digits.
Globally, gasoline has dominated recent growth, accounting for very nearly half the new barrels delivered in the third quarter. The world’s two biggest consumers make up roughly two-thirds of this extra gasoline, with China accounting for a quarter and the US for 42% of global gasoline demand growth in the third quarter. The weaker Chinese economy is having little, if any, apparent negative effect on Chinese oil demand growth, which at an estimated 600,000 b/d in Q3 accounted for roughly a third of the extra barrels of oil delivered globally. Preliminary estimates for Chinese demand in August show a near double-digit percentage point gain year-on-year. Gasoline led the way, even as reports of falling car sales failed to dent the sharp gains in the total size of the Chinese vehicle fleet.
Adding some 0.5m b/d in both the second and third quarters, US year-on-year growth estimates are not far behind China’s recent exuberance. US gasoline demand rose by an estimated 400,000 b/d in the third quarter, as more driving coincided with a price-driven swing towards less fuel-efficient vehicle choices.
While an extra 200,000 b/d demand growth was estimated in Europe during the third quarter as economic activity improved and lower crude prices played a role, down by around one-fifth in local currency terms, compared to the year before.
But the outlook for an expansion in oil demand is looking softer next year. The International Monetary Fund has cut its forecasts for economic growth, with big markdowns in oil-dependent economies, such as Canada, Brazil, Venezuela, Russia and Saudi Arabia. The stimulus from lower oil prices is also expected to fade next year with oil demand growth set to slow by 0.6m b/d to 1.2m b/d, reported the IEA. And the previously relentless expansion in non-Opec supply is also shrinking fast. For September, non-Opec oil production is estimated to have slipped by 180,000 b/d to 58.3m b/d on lower output in North America Although Brazil and Russia pumped at record rates in August and September respectively – pushing non-Opec output nearly 0.7m b/d above a year ago – that is down from gains of 2.7m b/d in December 2014. Supply in the US, which has long driven growth, is already sinking swiftly with year-on-year gains easing to just 300,000 b/d from 1.6m b/d during the first quarter.
Further cuts in drilling activity are expected to accelerate declines in US light tight oil production. After a brief recovery in active oil rigs over July and August, producers pulled 70 rigs out of service in September and early October, reducing the total number of rigs to only 605 in the week ending 9 October. The sector could be tested further in October as banks re-evaluate credit lines that are crucial to operators with little or negative free cash flow. Still, world oil supply held steady at near 96.6m b/d in September, as lower non-
Opec production was offset by a slight increase in Opec crude. Opec crude supply rose by 90,000 b/d in September to 31.72m b/d as record Iraqi output more than offset a dip in Saudi supply, which remained near record highs well beyond the 10m b/d mark.
But even low-cost Opec producers are tightening their belts. Spending curbs and a severe financial crisis are restricting supply growth in the near term in Iraq, which is now the world’s fastest source of additional barrels. While, output from neighbouring Iran could be on the rise too, once it is released from international sanctions and ramps up towards 3.6m b/d from 2.9m b/d. Just how quickly Iran can bring those extra barrels to the market will make a big difference to 2016 dynamics, warned the IEA.
To boot, rising
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