Has Global Oil Demand Really Surpassed Supply?

By Nick Cunningham

Oil inventories are falling around the world, a sign that the global oil market has already moved from supply glut into a deficit, according to the IEA’s latest Oil Market Report.

The Paris-based energy agency estimates that global oil stocks only climbed by a meager 0.1 million barrels per day in the first quarter, a rather bullish figure given the massive increase in inventories in the U.S. But the problem is that the U.S. has the most “visible” inventory data, so even if stocks are falling elsewhere around the world, the gains in the U.S. tend to overshadow global trends. So, while the OECD (which includes the U.S.) saw stocks rise by 0.3 mb/d in the first quarter, the world as a whole only saw a modest 0.1 mb/d increase.

Moreover, by March, even the OECD saw stocks start to drawdown. That means “that rebalancing is essentially here and, in the short term at least, is accelerating,” the IEA wrote in its latest report. Assuming the extension of the OPEC cuts, the IEA forecasts that the second quarter will see stock drawdowns widen to 0.7 mb/d. In other words, despite ongoing concerns about oversupply, the oil market is already in a supply deficit.

As the gap between demand and supply grows, the stock drawdowns will grow even more in the third and fourth quarters.

However, the IEA cautioned oil bulls not to get ahead of themselves. Even if these projections prove to be accurate, global inventories still might not fall back within the five-year average, “suggesting that much work remains to be done in the second half of 2017 to drain them further.”
Then the IEA laid out a series of caveats that put a damper on the headline-grabbing conclusion that the market is already in a supply deficit.

First, complicating the forecast is the pace of growth from U.S. shale. Using more accurate retrospective data, the IEA cites the fact that U.S. oil production rose to 9.03 mb/d in February, or 465,000 bpd higher than the low point reached in September. But more up-to-date but less rock-solid weekly data from the EIA suggests that production is already up to 9.31 mb/d, which is an increase of more than 700,000 bpd in eight months.

The impressive comeback has the IEA revising its forecast for U.S. shale growth this year, expecting growth of 790,000 bpd for 2017, an upward revision of 100,000 bpd from the IEA’s April report. U.S. shale continues to surprise and “such is the diversity and dynamism of the U.S. shale sector that our numbers are likely to be a moving target as 2017 progresses,” the report said.

Second, other OPEC countries could undermine the effectiveness of the production cut extension. “We need to keep a close eye on Libya and Nigeria where there are signs that production might be rising sustainably,” the IEA cautioned. Indeed, Libya says its production is at roughly a three-year high at over 800,000 bpd.

Nevertheless, the IEA’s ultimate message stands out: the oil market is tightening and is already likely in a deficit. Looking forward, that deficit will grow, which will push up oil prices, albeit gradually. The OPEC extension for nine-months will keep the market stable and moving forward, preventing a derailment and another meltdown in prices. While the IEA cautioned that the global inventory surplus would not be erased by the end of 2017, an extension through the end of the first quarter of 2018 might do the trick, according to Bloomberg estimates, with total OECD stocks finally dipping back into average territory by the end of that timeframe.

Other top analysts agree. In response to the OPEC extension, Manpreet Gill, head of FICC investment strategy at Standard Chartered said on Bloomberg TV that “it plays very well into the longer-term story that demand is ultimately growing at a faster pace than supply.” Gill went on to add that the OPEC extension “accelerates the pace of gains” for crude oil prices, projecting prices move up into a range of $60 to $65 per barrel.

By Nick Cunningham of Oilprice.com

 

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