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October 2019 Exclusive Story

Oil Markets

New Petrochem Plants Key for Demand Growth

PARIS–Global oil demand increased by 485,000 barrels a day in the first half of 2019, and the International Energy Agency predicts the second six months will see an acceleration to 1.65 million barrels a day, helped by robust petrochemical plant additions, a weak base of demand in the second half of 2018, and significantly lower oil prices year-over-year.

In its September Oil Market Report, IEA says its oil demand growth forecasts for 2019 and 2020 are unchanged at 1.1 MMbbl/d and 1.3 MMbbl/d, respectively. The agency notes that August’s crude oil prices were 15%-20% below year-ago levels, and predicts that will support consumption through next year.

Global oil demand reached 99.9 MMbbl/d in June, only 155,000 bbl/d higher than last year, the report indicates. It says the increase was the third lowest year-over-year growth figure seen since January. Consumption by members of the Organization for Economic Cooperation and Development fell 510,000 bbl/d but rose by 665,000 bbl/d in non-OECD countries. Demand dropped in Europe, Latin America, the Middle East and India, IEA details, with demand growth seen in China (750,000 bbl/d), Russia (95,000 bbl/d) and parts of Africa.

A post-hurricane rebound in the United States increased global oil supply 530,000 bbl/d in August, to 100.7 MMbbl/d. The report points to this expansion, as well as big gains from Norway and Brazil, as reasons for the growth outside the Organization of Petroleum Exporting Countries jumping from 1.9 MMbbl/d this year to 2.3 MMbbl/d in 2020. The non-OPEC surge will cut the need for the cartel’s crude to 28.3 MMbbl/d in the second half of 2020, 1.4 MMbbl/d below its August output.

Intercontinental Exchange Brent and New York Mercantile Exchange West Texas Intermediate traded at $61/bbl and $56/bbl, respectively, having risen from seven-month lows in early August, IEA says, adding they both were 20% below year-ago levels. U.S. prices climbed as new pipelines to transport Permian Basin crude came on line, and helped narrow the WTI-Brent differential.

Increasing Demand

The oil market has focused on demand, as growth weakens amid uncertainty about the global economy, particularly trade, IEA assesses. In its September Report, the agency says it maintains its 2019 growth estimate even though June data shows that demand increased year-over-year by less than 200,000 bbl/d. “For the second half of 2019, we retain the view that with oil prices currently about 20% lower than a year ago there will be support for consumers. Early data for June suggests that global demand grew by 1.3 MMbbl/d year-over-year,” IEA says.

Tensions in the Middle East Gulf have eased throughout September, and oil industry operations appear to be normal, the agency assesses. It points to a personnel change in Saudi Arabia as a major political event, reporting that Prince Abdulaziz bin Salman, an experienced industry figure, has been appointed the kingdom’s energy minister.

The compliance rate for the oil production agreement signed by OPEC and its allies has been high, but IEA indicates it has slipped to 116%. In August, Russia, Nigeria and Iraq produced 600,000 bbl/d above their allocations, but Saudi Arabia cut its production by an identical amount. “A reminder to the producers that competition for market share is getting tougher comes from preliminary data showing that in June the United States momentarily overtook Saudi Arabia and Russia as the world’s number one gross oil exporter,” the agency details.

The agency says it predicts balances for the second half of 2019 imply a stock draw of 800,000 bbl/d, basing that projection on the assumption of flat OPEC production, stronger demand growth and weaker non-OPEC supply growth. However, IEA says is this only a breather–2019’s second-half non-OPEC growth, although modest by recent standards at only 1.3 MMbbl/d, is measured against the high base set by the enormous production surge seen at this time last year.

“So far in 2019, U.S. crude oil production growth has stalled, with June output only 45,000 bbl/d higher than in December,” the report says. “Even so, output still is growing strongly on an annual basis, rising for the year by 1.25 MMbbl/d, with 1.0 MMbbl/d of growth to come in 2020. In Norway, long-awaited projects are coming on stream earlier than expected, and may ramp up to peak production ahead of schedule. Oil production in Brazil is growing fast, reaching 3.0 MMbbl/d in August, 400,000 bbl/d higher than just two months ago.”

While the relentless stock builds seen since early 2018 have halted, IEA asserts this is temporary. It says OPEC members and their allied producers once again will see surging non-OPEC oil production with the implied market balance returning to a significant surplus and placing pressure on prices.

Examining the global financial picture, the report notes that international trade relations continue to deteriorate, although early in October U.S. and Chinese officials announced a resumption of trade negotiations. Trade disputes and rising uncertainty about the impact of the United Kingdom’s possible exit from the European Union are reducing global growth through lower business and consumer confidence, supply chain reassessments, declining investments and direct trade reduction, the agency describes, noting one analysis shows the volume of world trade contracted by 0.3% year-over-year in the first quarter of 2019 and 0.7% in the second quarter.

The U.S. economy is not immune to the global downturn. IEA says industrial production growth has fallen steadily since its peak of 5.4% in September 2018, and was only 0.5% in July. Advanced indicators are not encouraging, the report notes, with the U.S. Institute for Supply Management’s manufacturing index dropping to 49.1 in August, its lowest level since January 2016.

Continuing U.S. Growth

The August rebound in U.S. oil production, with output jumping 530,000 bbl/d, is the fourth straight month with production topping the 100 MMbbl/d mark, IEA says. At 100.7 MMbbl/d, output was nonetheless down nearly 800,000 bbl/d from a year ago, because of reductions linked to sanctions and OPEC cuts. The cartel’s oil output during August was 2.4 MMbbl/d lower than the previous year, while non-OPEC supply increased 1.6 MMbbl/d year-over-year.

In addition to the U.S. production increase of 520,000 bbl/d month-on-month in August, the report points out Russia and Saudi Arabia delivered combined gains of 240,000 bbl/d. The agency also notes OPEC’s crude oil output increased to 29.74 MMbbl/d in August, driven by higher Saudi production, record Iraqi flows and increased supply from Nigeria.

Despite the month-on-month increase, Saudi Arabia continues to cut more than promised under the OPEC production agreement, and IEA says August marks the sixth consecutive month of outperformance. The figure, combined with losses in Iran and Venezuela because of sanctions, left August’s OPEC crude oil output trailing 2.4 MMbbl/d below 2018. Iranian production eased further in August, with output down 1.4 MMbbl/d from a year ago. Venezuela output, relatively steady month-on-month, was 520,000 bbl/d a year ago, while Nigeria, Libya and Iraq’s combined output was 400,000 bbl/d above 2018 levels.

U.S. crude and condensate production unexpectedly fell in June, as a 60,000 bbl/d decline in Oklahoma and smaller drops in Alaska (19,000 bbl/d) and New Mexico (14,000 bbl/d) offset marginal gains in Texas and North Dakota and as Gulf of Mexico production held steady, the report details. As such, June output was only 45,000 bbl/d higher than end-2018 levels. At 12.1 MMbbl/d, production nevertheless was 1.4 MMbbl/d higher than a year earlier. Crude output is estimated to have eased further in July as Hurricane Barry shut in 300,000 bbl/d of offshore production, and IEA predicts a sharp rebound in August as offshore output recovers and onshore supply posts additional gains.

The startup of more than 2.0 MMbbl/d of new pipeline capacity in the Permian Basin, and an uptick in fracturing operations in June and July is expected to spur further growth in output and exports from the Gulf Coast, IEA says. It adds producers are being cautious, with few signs of acceleration in drilling activity.

During August, operators reduced the number of rigs targeting oil by 26, so that in early September there were 738 rigs in operation, the report states, 122 fewer than a year ago. Companies are reporting they can drill more wells using fewer rigs. IEA indicates capital discipline remains in focus for many companies, which it predicts will lower U.S. supply growth through 2020.

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