Market balance draws near
"For some months now in this Report we have anticipated steady oil demand growth and falling non-OPEC supply. This scenario is now taking shape and the oil market looks set to move close to balance in the second half of this year. Oil prices are on the rise with Brent crude oil trading currently well above $40/bbl".
Read summary of the IEA report at: https://www.iea.org/oilmarketreport/omrpublic/
IEA: Oil Market Report - April 14
IEA: Oil Market Report - April 14
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group
Re: IEA: Oil Market Report - April 14
Comments below are from David Pursell at Tudor Pickering Holt:
IEA Monthly Report:
Global demand – IEA revised their 2015 demand by +0.1mmbpd mainly in China and ’15 growth is now a whopping 1.8mmbpd (+1.9%) y/y. The upward revision flows through the ’16 forecast leaving growth unchanged at a salty 1.2mmbpd (+1.3%) which is well above our +850kbpd (+90bps). Given the feedback on our recent demand report (March 30, 2016) it is clear the ’16 consensus is strongly clustered around the IEA’s 1.2mmbpd outlook.
Non-OEPC supply – minor tweaks lower but the 2016 outlook is unchanged with 700kbpd y/y declines (1.2%) after +1.4mmbpd growth in ’15 and +2.5mmbpd in ’14. TPHe ’16 is closer to 1mmbpd lower with ~750kbpd y/y declines in the US alone. [I believe U.S. production declines will accelerate this summer. Active rig count has fallen hard and fast. We are not drilling nearly enough new wells for supply to hold up. - Dan]
Inventories – Feb’16 OECD inventories built +7mmbbls (vs. normal 23mmbbls draw) on upwardly revised Jan inventory levels. Revised Jan stocks are +38mmbbls above Dec levels which is close to normal Jan build of +34mmbbls. The IEA suggests early indications of March stocks is for a further build (no magnitude given) against normal ~flat stocks…given the positive March trends in US inventories we would be surprised to see a meaningful build when March OECD inventories unveiled next month.
OPEC – probably the most interesting part of this report is the OPEC March’16 production data which was ~100kbpd lower vs. Feb’16 and less than 100kbpd above 4Q15 levels. The March m/m declines driven by small declines in Saudi, Iraq, UAE, Venezuela and Nigeria with partially offsetting growth in Iran and Angola. A little more detail in Iran and Iraq:
Iran – March’16 production was +80kbpd m/m and +400kbpd above 4Q15 levels. Post-sanctions production growth has been well below street +1mmbpd view and our +500kbpd base case. Not surprising that Iranian production is disappointing given the declines established pre-sanctions and the lack of oilfield directed capital and technology during the 4-years of sanctions (2012-15). Iranian production can ultimately grow with capital and technology….but not in ’16 or ’17.
Iraq – March’16 production was down slightly m/m (30kbpd) and is 100kbpd below 4Q15 level. Production is lower most likely due to pipeline “issues” in the north/Kurdistan region but we can't help wonder if some of the decline is due to no more Iran/Iraq cross-border leakage post-sanctions. [As I posted here many times, I believe Iran was smuggling oil out through Iraq during the sanction period. - Dan]
Bottom line – combined Iran/Iraq March’16 production is up only 300kbpd since 4Q15. With lack of capital investment in both countries, we would expect to see combined production decline throughout ’16 from 1Q16 levels.
IEA Monthly Report:
Global demand – IEA revised their 2015 demand by +0.1mmbpd mainly in China and ’15 growth is now a whopping 1.8mmbpd (+1.9%) y/y. The upward revision flows through the ’16 forecast leaving growth unchanged at a salty 1.2mmbpd (+1.3%) which is well above our +850kbpd (+90bps). Given the feedback on our recent demand report (March 30, 2016) it is clear the ’16 consensus is strongly clustered around the IEA’s 1.2mmbpd outlook.
Non-OEPC supply – minor tweaks lower but the 2016 outlook is unchanged with 700kbpd y/y declines (1.2%) after +1.4mmbpd growth in ’15 and +2.5mmbpd in ’14. TPHe ’16 is closer to 1mmbpd lower with ~750kbpd y/y declines in the US alone. [I believe U.S. production declines will accelerate this summer. Active rig count has fallen hard and fast. We are not drilling nearly enough new wells for supply to hold up. - Dan]
Inventories – Feb’16 OECD inventories built +7mmbbls (vs. normal 23mmbbls draw) on upwardly revised Jan inventory levels. Revised Jan stocks are +38mmbbls above Dec levels which is close to normal Jan build of +34mmbbls. The IEA suggests early indications of March stocks is for a further build (no magnitude given) against normal ~flat stocks…given the positive March trends in US inventories we would be surprised to see a meaningful build when March OECD inventories unveiled next month.
OPEC – probably the most interesting part of this report is the OPEC March’16 production data which was ~100kbpd lower vs. Feb’16 and less than 100kbpd above 4Q15 levels. The March m/m declines driven by small declines in Saudi, Iraq, UAE, Venezuela and Nigeria with partially offsetting growth in Iran and Angola. A little more detail in Iran and Iraq:
Iran – March’16 production was +80kbpd m/m and +400kbpd above 4Q15 levels. Post-sanctions production growth has been well below street +1mmbpd view and our +500kbpd base case. Not surprising that Iranian production is disappointing given the declines established pre-sanctions and the lack of oilfield directed capital and technology during the 4-years of sanctions (2012-15). Iranian production can ultimately grow with capital and technology….but not in ’16 or ’17.
Iraq – March’16 production was down slightly m/m (30kbpd) and is 100kbpd below 4Q15 level. Production is lower most likely due to pipeline “issues” in the north/Kurdistan region but we can't help wonder if some of the decline is due to no more Iran/Iraq cross-border leakage post-sanctions. [As I posted here many times, I believe Iran was smuggling oil out through Iraq during the sanction period. - Dan]
Bottom line – combined Iran/Iraq March’16 production is up only 300kbpd since 4Q15. With lack of capital investment in both countries, we would expect to see combined production decline throughout ’16 from 1Q16 levels.
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group
Re: IEA: Oil Market Report - April 14
Along with production in the United States, lower oil prices are beginning to hit production in other parts of the world as well. Smaller producers in Latin America and the North Sea are also beginning to pull the throttle back on their output, reports The Wall Street Journal.
In March, overall production in Latin America dropped below 8 MMBOPD for the first time in since March 2014. Nearly all of Brazil’s largest fields could see declines this year, and production in Mexico and Venezuela have also been tapering off.
Norway’s crude oil production grew by 4% to 1.56 MMBOPD in 2015, but is now expected to decline by 2% before gradually leveling off at 1.38 MMBOPD in 2019, according to the Norwegian Petroleum Directorate.
London-based research consultancy Energy Aspects recently revised its estimates for non-OPEC production declines this year to 700 MBOPD from 200-300 MBOPD previously. Energy Aspects expects demand will outpace supply and begin drawing down on global crude inventories by the middle of the year.
In 2010, the last year of the previous oil price cycle, the IEA grossly under-estimated demand growth. The started that year with an estimate the demand would grow 1,200,000 barrels per day year-over-year. When the final stats were in for 2010, demand had grown by 3,300,000 barrels per day. This cycle it appears (to me at least) that IEA is under-estimating the supply response to lower oil prices. I believe we will see an acceleration of falling supply and it won't just be in the United States. I believe Non-OPEC oil production will fall by more than 2,000,000 barrels per day from December, 2015 to December, 2016. - Dan
In March, overall production in Latin America dropped below 8 MMBOPD for the first time in since March 2014. Nearly all of Brazil’s largest fields could see declines this year, and production in Mexico and Venezuela have also been tapering off.
Norway’s crude oil production grew by 4% to 1.56 MMBOPD in 2015, but is now expected to decline by 2% before gradually leveling off at 1.38 MMBOPD in 2019, according to the Norwegian Petroleum Directorate.
London-based research consultancy Energy Aspects recently revised its estimates for non-OPEC production declines this year to 700 MBOPD from 200-300 MBOPD previously. Energy Aspects expects demand will outpace supply and begin drawing down on global crude inventories by the middle of the year.
In 2010, the last year of the previous oil price cycle, the IEA grossly under-estimated demand growth. The started that year with an estimate the demand would grow 1,200,000 barrels per day year-over-year. When the final stats were in for 2010, demand had grown by 3,300,000 barrels per day. This cycle it appears (to me at least) that IEA is under-estimating the supply response to lower oil prices. I believe we will see an acceleration of falling supply and it won't just be in the United States. I believe Non-OPEC oil production will fall by more than 2,000,000 barrels per day from December, 2015 to December, 2016. - Dan
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group
Re: IEA: Oil Market Report - April 14
From Merrill Lynch 4/14/2016
A rebound in crude imports from last week’s unexpected drop resulted in a large build
that exceeded expectations (+6.6mmb). But, if the past two weeks are viewed together,
inventories have only risen 1.7mm bbls. With Keystone offline for eight days, Cushing
stocks dropped 1.8mm bbls and are now 3mm bbls from the peak on 3/11. For the US as
a whole, the rate of build in total crude stocks since the start of the year is almost exactly
half the rate of last year – 54mm bbls in 2016 vs 101mm bbls in 2015. Seasonally, we are
within two weeks of the typical peak in crude stocks which will begin to draw on higher
crude runs. Beyond this seasonal aspect, an acceleration in the decline of US shale is also
supportive of tighter balances: oil production this week dropped below 9mmbpd to 8.977
mmbpd – down 31,000 bpd (0.3%) and now 407,000 bpd lower yoy (-4.3%). And with the
underinvestment in US Shale, declines are expected to accelerate according to the EIA’s
latest Drilling Productivity Report. Why does all of this matter? In our view, an inflection
in US crude inventories is a critical lead indicator for market sentiment on the outlook for
oil prices. That said, the next key driver of market sentiment is now Doha and the
potential for a production freeze agreement on Sunday, April 17th.
The collapse in oil prices to $27/bbl has created some common ground for producers to
sit down and discuss an oil output freeze. We argued back in mid-February that the
upcoming meeting in Doha signaled a turning point for the oil market and reiterated our $47/bbl
Brent target by midyear. But will Saudi agree to freeze output? And will
it matter? An output freeze in Doha was not our base case scenario, a view supported by
recent public comments from the Saudi Deputy Crown Prince. But it would further help
the bullish case for oil. A flat output profile for OPEC (ex Iran) + Russia would tighten
global balances by almost 0.5 million b/d in 2H16 relative to our expectations and push
the oil market into a deficit in 3Q16.
A production freeze may push oil above $50 near-term
Truth be told, there is hardly any information on what will be discussed at Doha this
Sunday. So in this note we develop four possible scenarios: back to a price war, no
output freeze, a soft output freeze, and a hard output freeze with some enforcement
mechanism. In our view, the last two scenarios would send Brent prices above $50/bbl in
relatively short order, while the first two outcomes could lead to a price drop below
$40/bbl. Having said all that, the global oil market is rebalancing, freeze or no freeze,
due to a drop in US supplies and rising global demand. Stocks are set to draw
structurally starting in 4Q16, in our estimates. So we still project oil prices to trade on
average back above $50/bbl next year.
A rebound in crude imports from last week’s unexpected drop resulted in a large build
that exceeded expectations (+6.6mmb). But, if the past two weeks are viewed together,
inventories have only risen 1.7mm bbls. With Keystone offline for eight days, Cushing
stocks dropped 1.8mm bbls and are now 3mm bbls from the peak on 3/11. For the US as
a whole, the rate of build in total crude stocks since the start of the year is almost exactly
half the rate of last year – 54mm bbls in 2016 vs 101mm bbls in 2015. Seasonally, we are
within two weeks of the typical peak in crude stocks which will begin to draw on higher
crude runs. Beyond this seasonal aspect, an acceleration in the decline of US shale is also
supportive of tighter balances: oil production this week dropped below 9mmbpd to 8.977
mmbpd – down 31,000 bpd (0.3%) and now 407,000 bpd lower yoy (-4.3%). And with the
underinvestment in US Shale, declines are expected to accelerate according to the EIA’s
latest Drilling Productivity Report. Why does all of this matter? In our view, an inflection
in US crude inventories is a critical lead indicator for market sentiment on the outlook for
oil prices. That said, the next key driver of market sentiment is now Doha and the
potential for a production freeze agreement on Sunday, April 17th.
The collapse in oil prices to $27/bbl has created some common ground for producers to
sit down and discuss an oil output freeze. We argued back in mid-February that the
upcoming meeting in Doha signaled a turning point for the oil market and reiterated our $47/bbl
Brent target by midyear. But will Saudi agree to freeze output? And will
it matter? An output freeze in Doha was not our base case scenario, a view supported by
recent public comments from the Saudi Deputy Crown Prince. But it would further help
the bullish case for oil. A flat output profile for OPEC (ex Iran) + Russia would tighten
global balances by almost 0.5 million b/d in 2H16 relative to our expectations and push
the oil market into a deficit in 3Q16.
A production freeze may push oil above $50 near-term
Truth be told, there is hardly any information on what will be discussed at Doha this
Sunday. So in this note we develop four possible scenarios: back to a price war, no
output freeze, a soft output freeze, and a hard output freeze with some enforcement
mechanism. In our view, the last two scenarios would send Brent prices above $50/bbl in
relatively short order, while the first two outcomes could lead to a price drop below
$40/bbl. Having said all that, the global oil market is rebalancing, freeze or no freeze,
due to a drop in US supplies and rising global demand. Stocks are set to draw
structurally starting in 4Q16, in our estimates. So we still project oil prices to trade on
average back above $50/bbl next year.
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group