Energy Prospectus

Oil Market Report: 11 April 2019

Highlights (You have to be a paid subscriber to see the full report)

•Our global demand growth estimates for 2018 and 2019 are again unchanged at 1.3 mb/d and 1.4 mb/d, respectively. After a slow start to the year, OECD growth will be 0.3 mb/d, with non-OECD growing by 1.1 mb/d.

•Demand in China, India and the US is estimated to have grown by 1 mb/d in Jan-Feb 2019. OECD demand fell in 4Q18 for the first time since end-2014 and also in 1Q19, mainly on weaker European numbers, but it will recover, led by the US.

•Global oil supply dropped 340 kb/d in March, as OPEC+ cuts deepened and Venezuelan output fell sharply. At 99.2 mb/d, it was 3.1 mb/d below November 2018 and up 530 kb/d y-o-y. In 2019, non-OPEC production will grow 1.7 mb/d versus 2.8 mb/d last year.

•OPEC crude oil production tumbled 550 kb/d in March, to 30.1 mb/d, on further cuts from Saudi Arabia and steep losses in Venezuela. Saudi output dropped to its lowest in over two years, boosting compliance with supply cuts to 153%. The call on OPEC rises to 30.9 mb/d in 2Q19. < This means that IEA now expects demand for oil to exceed supply by 800,000 bbls per day in Q2. In their March report, IEA predicted that demand in Q2 would exceed supply by 500,000 BOPD.

•Global refining throughput fell by 2.5 mb/d in March as unplanned outages and accidents hindered the US in particular. Our 2019 growth estimate is revised down to 0.7 mb/d on tighter crude market fundamentals: 3Q19 could see the largest draws since 2011. < This is a rather BOLD sentence for an IEA report.

•OECD oil stocks fell by 21.7 mb on the month in February after three months of increases. The decrease was more than the five-year average of 5.1 mb due to larger gasoline draws and a lower crude build. March preliminary data show a significant crude build in Europe.

•ICE Brent reached a five-month high above $71/bbl in early April on supply concerns. New infrastructure capacity in the US helped WTI to narrow its discount to Brent to $7/bbl. Gasoline markets continued to rally, while cracks for most other refined products fell in March.

Conclusion

The huge increase in oil production we saw in 2H18 has reversed following the implementation of the new Vienna Agreement and the increasing effectiveness of sanctions against Iran and Venezuela. Production by OPEC countries in March was 2.2 mb/d lower than in November and now there is uncertainty concerning Libya. Production by non-OPEC producers in 1Q19 was 0.7 mb/d lower than in 4Q18. This turnaround in supply has contributed to a dramatic increase in prices, with Brent crude rising from $50/bbl at the end of December to more than $70/bbl today.

TPH's take on the IEA report:

OECD inventories declined 21.7mmbbls in February after three consecutive months of increases, though following a +11.5mmbbls revision for January (following a prior December +15mmbbls revision), stocks remain 16mmbbls above the 5-yr avg. at 2,871mmbbls. The monthly downtick exceeded the 5-yr average of 5.1mmbbls driven by large gasoline draws and lower crude build, suggesting a ~600mbpd undersupply relative to 5-yr norms. Preliminary March data is mixed as declining US and Japan inventories are expected to be offset by significant rise in Europe stocks.

Compliance to announced cuts increased for both OPEC (153% from 94% in Feb) and non-OPEC groups (64% from 51% in Feb). Directionally in line with yesterday's OPEC release, Saudi carrying lion's share of production cuts reducing production ~800mbpd (vs. 322mbpd agreed) from October supply baseline, while Iraq, Algeria, and Angola compliance also crept higher for the month.

Russia's compliance increased to 52% from 36% in Feb.

Venezuela and Iran, although exempt from the production cuts, have jointly reduced production by ~700mbpd since November, while Libya production has remained steady, reaching its highest level since 2013 at 1.2mmbpd in March (thanks to output rising at El Sharara, production uncertain going forward given escalating unrest in the country).

Overall, global oil supply was down 340mbpd in March driven by disciplined OPEC+ cuts and declining Venezuelan output, and the IEA expects the oil market to tighten from mix of slower growth in the US (lower budgets/drilling activity, parent-child issues), declines in N. Sea and Mexico, and continued OPEC+ cuts. On the demand side, growth estimates remain unchanged at 1.4mmbpd for 2019 despite a slow start to the year (and revised expectations for lower GDP growth), reaffirming strong growth expectations from China and India.

TPH take on the OPEC Oil Market Outlook

Big drop in OPEC March production with Saudi Arabia, Venezuela, and Iraq declining most

OPEC published its monthly oil market report yesterday with both '19 global oil demand growth and non-OPEC supply growth revised lower, and a notable slump in Mar-19 OPEC production.

On the supply side, 2019 non-OPEC supply growth was revised 60mbpd lower to 2.18mmbpd driven by extended maintenance in Kazakhstan, Brazil, and Canada, somewhat offset by upward revisions in US and Russia. Mar-19 OPEC crude production tumbled 534mbpd m/m to ~30mmbpd (lowest since Feb-15) largely driven by Saudi Arabia (-324mbpd), Venezuela (-289mbpd), and Iraq (-126mbpd), slightly offset by increase in Libya production (+196mbpd).

Going forward, Venezuela production likely continues to decline given blackouts, US sanctions, and overall instability in the country, and Libya production could also migrate lower given ongoing unrest in Tripoli.

In terms of compliance to announced production cuts, total OPEC compliance climbed to ~155% vs. ~104% in Feb-19; Saudi Arabia compliance soared to ~261% as the Kingdom aggressively presses to curb oversupply in the market, while Iraq was at ~93%.

On the demand side, 2019 global oil growth was revised 30mbpd lower to 1.21mmbpd (modest in magnitude, but notable takeaway) due to slower than expected economic activity vs. last month's outlook.