Oil Supplies May Be Tighter Than Perceived

Friday, April 22, 2016

In the latest edition of the Numbers Report, we’ll take a look at some of the most interesting figures put out this week in the energy sector. Each week we’ll dig into some data and provide a bit of explanation on what drives the numbers.

Let’s take a look.

1. China’s oil demand slowing

- China has long-been the engine of growth for oil demand, but that is increasingly no longer the case. Last year China’s oil demand grew by 370,000 barrels per day, but that growth rate is expected to slow to just 290,000 barrels per day in 2016.
- On the supply side, low oil prices could hit China’s oil production, with output set to fall from 4.3 million barrels per day (mb/d) in 2015 down to 4.1 mb/d this year.
- But lower supply could mean that China’s imports rise at a faster rate.
- Steady, if not surging demand growth, plus falling production and elevated imports to fill up China’s strategic petroleum reserve could combine to push oil imports much higher. Barclays predicts China’s imports rocket from 6.7 mb/d in 2015 to 8 mb/d this year.

2. Oil storage levels still at record highs

- Oil storage levels around the world are at record highs, a massive weight that could prevent oil prices from rising much in the near-term.
- In February, the latest month for which data is available, oil inventories rose counter-seasonally, jumping by 7.3 million barrels. By the end of the month OECD storage levels topped 3,060 million barrels. That is 387 million barrels above the five-year average.
- Early data suggests March saw stock builds as well. In the U.S., oil storage levels are at an all-time high, above 530 million barrels.
- Inventories for refined products are also elevated, with 33.5 days’ worth of supply sitting in storage, which is 3 days above year-ago levels.
- A drawn down in crude oil and refined product stocks must begin before oil prices can stage a sustained rally.

3. Supply outages in Nigeria

- Oil exports from West Africa remain at a record low, according to the IEA, largely due to a major supply outage in Nigeria.
- The Forcados oil export terminal, one of the country’s largest, is offline after a pipeline was sabotaged.
- Oil shipments from West Africa fell by 250,000 barrels per day in March. The Forcados outage accounted for much of that. Shipments from West Africa to the United States has also been down for quite some time because of light, tight oil in Texas and North Dakota.
- The Forcados pipeline may not be repaired until June. The outage has taken a quarter of a million barrels per day of supply offline, which has helped buoy oil prices somewhat. A few years ago, a supply outage of this magnitude would have sent prices skyrocketing.

4. Global refining running full throttle

- As of January, global refineries were churning through an additional 2 mb/d compared to January 2015. Two-thirds of the incremental increase came from non-OECD countries. China, in particular, has seen its refineries ramp up output as the government loosened rules on imports.
- The high levels of refinery utilization is a strong sign that cheap fuel is stoking very robust demand for gasoline, diesel and other refined products.
- For 1Q2016, refinery runs are estimated to be 1.2 mb/d above year ago levels, in line with oil demand growth. But some maintenance will cut into refinery runs in the second quarter, putting year-on-year gains at a rate of 750,000 barrels per day. Utilization then picks up again in the summer at a rate of 1.5 mb/d from 2015 levels.
- Refinery runs are not even across the OECD, however. Runs are up 350,000 barrels per day in the U.S. but down in Europe, Japan and Canada.

5. OPEC spare capacity still low

- Nobody seems to notice, but OPEC’s spare capacity is near its lowest level in 8 years.
- OPEC is producing flat out – which, of course, is a big reason why oil prices have crashed – but that leaves little room for error in the event of a major supply disruption.
- Moreover, Iran is in the process of bringing 1 mb/d of oil production back to the market have being forced offline from western sanctions. In the short-term, that rising output will weigh on oil prices. But that output represented some latent spare capacity that will be used up.
- The low levels of global spare capacity may not matter in 2016 or even 2017, with record levels of oil sitting in storage, but as international companies cut output and defer investment, the oil markets could tighten significantly in the medium-term when supply fails to keep up with demand and OPEC is no longer able to ramp up oil fields sitting on the sidelines.

6. India takes over from China

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- As of February, India’s demand growth hit nearly 500,000 barrels per day from a year earlier, the fourth highest growth rate on record.
- India’s oil demand, at 4.59 mb/d, is now at a record high and climbing. Gasoline demand is up 13 percent from 2015 levels.
- With China’s demand slowing, India is taking over as the world’s most important engine of growth for oil. Cheap oil, rising incomes, rising use of vehicles, strong GDP growth, and cheap credit are all working together to push up consumption.
- “Structural and policy-driven changes are underway which could result in India’s oil demand ‘taking off’ in a similar way to China’s during the late 1990s,” Energy Aspects concluded in March.

7. Kuwait more important than Doha

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- The Doha talks collapsed in failure, but few expected them to have much of an impact anyway.
- Oil prices crashed in the immediate aftermath of the talks on Monday, but quickly regained ground.
- A much bigger event occurred at the same time as Doha. A workers strike in Kuwait knocked off more than 1.5 million barrels of oil production per day, cutting in half the country’s output.
- That is more than the entire global surplus in oil production. The outage didn’t last for a long time, as the workers ended their strike. But illustrates the extreme unpredictability of today’s market.
- It also illustrates that the markets are not as oversupplied as many believe – if the oil workers from one country can single-handedly erase the global glut for crude oil, maybe supplies are tighter than perceived. And, of course, as it relates to #6 above, with spare capacity at its lowest level in 8 years, a supply shock somewhere down the line could spark a major rally in oil prices.

That’s it for this week’s Numbers Report. Thanks for reading, and we’ll see you next week.