Following strong demand growth in 1Q18, in 2Q18 and 3Q18 the pace has slowed dramatically to a relatively subdued 1 mb/d. In 4Q18 we expect a rebound and demand will be 100.2 mb/d.
For 2018, our global demand growth outlook is unchanged at 1.4 mb/d. In 2019 growth accelerates slightly to 1.5 mb/d, but there are risks to the forecast from escalating trade disputes and rising prices if supply is constrained.
Global oil supply rose by 300 kb/d in July to 99.4 mb/d, 1.1 mb/d above a year-ago. Compliance with the Vienna Agreement eased to 97% in July as output cuts were relaxed. Non-OPEC production is expected to grow by 2 mb/d in 2018 and by 1.85 mb/d next year.
OPEC crude oil output was steady in July, at 32.18 mb/d. An unexpected decline in Saudi Arabian supply was offset by higher production from the UAE, Kuwait and Nigeria. OPEC compliance was unchanged in July at 121%.
OECD commercial stocks fell seasonally by 7.2 mb in June to 2 823 mb and were 32 mb below the five-year average. Stocks at the end of 2Q18 were up 6.6 mb versus end-1Q18, the first quarterly increase seen since 1Q17. Outside the OECD, inventories were also mostly higher during the quarter.
ICE Brent prices fell in July on higher global output, while NYMEX WTI prices rose on strong US refining and exports. Both benchmarks are up 50% y-o-y. The Brent/WTI differential in July narrowed sharply versus June.
Global refinery throughputs in 2H18 are expected to be 2 mb/d higher than in 1H18. Due to high summer demand, refined products stocks will draw before building again in 4Q18. The outlook will be heavily influenced by Iranian crude flows and resulting changes to crude prices and margins.
As suggested in last month’s Report, the northern hemisphere summer has proved to be anything but quiet. Record high temperatures are causing various disruptions: low water levels in the Rhine are hampering barge traffic, refinery operations are impacted in certain locations, warm water is affecting nuclear power plants, and air-conditioning demand is soaring. Record temperatures are unlikely to influence significantly road and air transport demand one way or the other as holiday plans were typically made many weeks or months ago, but the sunny weather might provide a short-lived, modest boost. New data will show us in due course.
Meanwhile, concerns about the stability of oil supply have cooled down somewhat, at least for now. We have seen increases in production, mainly in Saudi Arabia and Russia, a surge in US exports in June that saw a record weekly average level of 3 mb/d, and a partial, but fragile, recovery in Libya. Ample supply has contributed to the Brent price falling from just over $79/bbl at the end of June to below $72/bbl earlier this week. This cooling down in prices is clearly welcome for consumers: the biggest single product market in the world is US gasoline and the national average price increase seen during the spring seems to have stalled for the time being.
With so much focus on geopolitics in recent months, underlying demand trends have perhaps received less attention but there are interesting developments. As far as growth is concerned, the global number for 2018 looks solid for now at 1.4 mb/d. However, this is heavily influenced by demand in 1Q18 when growth was more than 1.8 mb/d, mainly due to low temperatures in the northern hemisphere. As we move through 2Q18 and 3Q18, growth is estimated at only 1 mb/d, partly due to comparisons with high year-ago demand levels and because prices (based on Brent crude) have typically been about 45% higher. In OECD Europe, oil demand fell below last year’s level in 2Q18, and in the US falling gasoline demand has contributed to more than the halving of total demand growth in 2Q18 versus 1Q18. The two leading non-OECD oil markets, China and India, both remain on course to grow solidly this year, although data issues with respect to China cloud the picture to some extent. As mentioned in recent editions of this Report, some developing countries are taking steps to shield consumers from higher prices. An example is Indonesia where plans are being made to increase sharply subsidies to maintain diesel and gasoline prices at current levels.
For 2019 demand growth, we have actually revised our outlook slightly upwards by 110 kb/d, partly influenced by the downward move of the forward price curve. Even so, there are considerable uncertainties. The risks to stable supply that will grow later this year could cause higher prices and thus impact demand growth. Another factor to consider is that trade tensions might escalate and lead to slower economic growth, and in turn lower oil demand. Trade tensions partly explain why the International Monetary Fund, in its recent World Economic Outlook Update, said, “The balance of [economic] risks has shifted further to the downside, including in the short term”. For now, we have made no changes to our underlying economic and oil demand assumptions, but we are mindful that demand growth could cool down later this year and into 2019. If this does happen, it might dampen to some extent the impact on prices of any supply pressures.
The recent cooling down of the market, with short term supply tensions easing, currently lower prices, and lower demand growth might not last. When we publish our next report in mid-September, we will be only six weeks away from the US’s deadline for Iran’s customers to cease oil purchases. As oil sanctions against Iran take effect, perhaps in combination with production problems elsewhere, maintaining global supply might be very challenging and would come at the expense of maintaining an adequate spare capacity cushion. Thus, the market outlook could be far less calm at that point than it is today.