Global Oil Market - May 15

[dan_s]

Comments below are from the Tudor Pickering Holt (TPH) Morning Report.

IEA May'19 Oil Market Report
Notable March draw, lowered '19 demand forecast

OECD inventories declined 25.8mmbbls in March, a markedly bigger drop than 5-yr average of 4mmbbls decline. Total OECD inventories now tracking below 5-yr average for first time in five months (-2mmbbls at 2,849mmbbls). OEDC oil inventories were down for the second straight month, although February was revised +3.8mmbbls (up in Europe and Asia Oceania, down in Americas) and January was revised -8.8mmbbls (down in all regions).

March decline was largely driven by 20.3mmbbls drop in motor gasoline and a counter-seasonal drop in crude of 6.3mmbbls. Additionally, stocks in days of forward demand declined to lowest level since Jul'18 (59.8 days). Preliminary April data is mixed as uptick in US and Japan inventories is expected to be offset by declining stocks in Europe.

OPEC's April crude supply increased for first time in four months (+60mbpd vs. flat as per yesterday's OPEC report). Compliance to announced cuts climbed m/m for non-OPEC group (151% vs. 61% in Mar), driven by increased compliance from Russia, Azerbaijan, and Kazakhstan (Kashagan field shutdown); while OPEC's compliance declined to 131% (from 147%) driven by production uplift in Iraq and Nigeria. Saudi Arabia held production ~flat in April, with preliminary data suggesting the Kingdom's exports could climb in May, whereas Libya increased output to a 6-yr high as El Sharara reached full capacity. Venezuela output fell 40mbpd as US sanctions kicked in and power outages continued.

Additionally, the IEA lowered its Brazil growth forecast by 60mbpd to 265mbpd y/y (more in-line with our estimates), and increased growth forecast for China (+100mbpd) as the government aims to boost domestic production/reserves.

On the demand side, the IEA revised down '19 growth forecast by 90mbpd to 1.3mmbpd suggesting a weak Q1'19 followed by significant pick up during rest of year.
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OPEC Oil Market Outlook
No major change to overall forecast; aggressive production ramp in Iraq offset by Iran supply reduction

OPEC published its monthly oil market report yesterday with slight downward revision to '19 non-OPEC supply growth, ~flat m/m April OPEC production, and no change to '19 demand forecast.

On the supply side, non-OPEC '19 production growth was revised slightly lower by 0.03mmbpd to +2.14mmbpd driven by soft Q1'19 supply in the US ('19 growth revised -22mbpd vs. last month's report), Brazil (-11mbpd), and the UK (-18mbpd), somewhat offset by upward revisions in China (+32mbpd). OPEC projects the US (+1.85mmbpd), Brazil (+0.30mmbpd), and Russia (+0.19mmbpd) to drive major chunk of '19 supply growth, while Mexico (-0.14mmbpd), Kazakhstan (-0.07mmbpd), and Norway (-0.06mmbpd) will see the biggest declines. As per secondary sources, OPEC April production was ~flat m/m driven by an aggressive ramp in Iraq (+113mbpd m/m), and more modest increases in Nigeria (+92mbpd) and Libya (+71mbpd), offset by supply reductions in Iran (-164mbpd), Saudi Arabia (-45mbpd), and Angola (-41mbpd).

Despite April uplift, both Libya and Nigeria remain wildcards given unrest and pipeline issues in the countries respectively. Saudi Arabia now ~275% compliant to agreed cuts (vs. Oct-18 production), while with April ramp, Iraq compliance drops to ~15%. No change in '19 demand growth forecast from last month's downward revision to +1.21mmbpd, although some movement in region specific numbers with upward revisions in OECD Americas and China, offset by downward revisions in OECD Europe, Latin America, and the Middle East.
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MY TAKE: The annual crude oil demand growth period is from May to Sept each year. Demand for oil flattens out in Q4, Q1 is usually flat but can be impacted by Northern Hemisphere weather (colder than normal weather in areas that still use a lot of oil for space heating like NE U.S. and Europe.) So...Demand will be going up over 1.5 million BOPD this summer and production coming out of Iran and Venezuela will be dropping by ~1.0 million BOPD. OECD oil inventories should continue to fall for the rest of this year and IMO 2020 Regulations (low sulfur fuel for ships) will start having an impact in ~ six months. The global oil market is going to be very tight by year-end and wildcard like Libya could have a big impact. Raymond James sticking with their forecast of $90/bbl WTI in Q1 2020. All of my forecast/valuation models assume WTI averages $65/bbl in 2020.