OIL: RISKS DOWN, CONSUMPTION UP
July - August 2014
The U.S. Energy Information Administration (EIA) estimates that global oil inventory draws averaged 0.2 million barrels per day (bbl/d) in July and August, with inventories declining by 0.7 million bbl/d in July and building by 0.4 million bbl/d in August (Figure 1). The recent inventory builds are somewhat atypical for this time of year and signal a relatively loose global crude oil market compared with conditions over the past three years. Weaker oil demand and lower refinery runs compared to last year in European and Asian countries within the Organization for Economic Cooperation and Development (OECD) have reduced market tightness. Nevertheless, these conditions may be temporary and the risk for tighter markets in the future remains elevated due to persistently high supply disruptions and relatively low surplus crude oil production capacity.
A reduction in geopolitical risks surrounding Iraqi and Libyan oil supplies in July, coupled with generally weak demand in August, pushed North Sea Brent crude oil prices to their lowest levels of the year. The Brent front month futures contract averaged $102.50 per barrel for the five-trading-days ending August 26, about $12 per barrel lower compared with the average price for the five-trading-days ending June 26 (Figure 2). The July and August 2014 average price for Brent was nearly $3 per barrel lower compared to the same time last year.
Geopolitical risks to near-term supply have abated somewhat since June when violence in northern Iraq escalated causing northern production (outside of Iraqi Kurdistan) to come to a near-halt and Libya's production and exports were at a minimal level. Iraq's southern crude oil exports still remain unaffected by the unrest in northern Iraq, averaging 2.44 million bbl/d in July, 0.2 million bbl/d higher than the average during first quarter 2014. In Libya, crude oil exports restarted at the country's two major eastern ports, Es Sidra and Ras Lanuf, after being blocked by protestors for about a year. Libya's production averaged 0.5 million bbl/d during July and August, more than 0.2 million bbl/d higher than the previous two months (Figure 4). However, the situation in Libya is still very precarious as the security situation remains volatile, with a significant possibility of intermittent disruptions.
Global petroleum and other liquids1 consumption in July and August averaged 92.2 million bbl/d, 0.9 million bbl/d higher than the previous two-month period and 1.0 million bbl/d higher than the same time last year. Non-OECD consumption averaged 46.3 million bbl/d, 1.6 million bbl/d higher compared with the same time last year, more than offsetting lower consumption from the OECD, particularly Europe and Japan.
Global petroleum and other liquids production in July and August averaged 92.0 million bbl/d, 0.4 million bbl/d higher than the previous two-month period and 1.1 million bbl/d higher than the same time last year. Non-OPEC production averaged 56.1 million bbl/d, 1.8 million bbl/d higher compared with the same time last year, more than offsetting lower crude oil output from OPEC countries.
Global surplus crude oil production capacity averaged 1.8 million bbl/d in July and August, 0.3 million bbl/d lower than the previous two-month period but 0.2 million bbl/d higher than the same time last year. Surplus capacity tends to be lower in the summer months because Saudi Arabia, the only significant surplus capacity holder, increases production for direct crude oil burn for power generation. The estimate of effective surplus capacity does not include additional capacity that may be technically available in Iran, but which is offline because of the effects of U.S. and European Union (EU) sanctions on Iran's ability to sell its oil.
The Brent futures curve moved into contango (when near-term prices are less than longer-dated ones) for the first time this year in early August, supporting estimates that global inventories grew in August. The 1st-13th month spread for the Brent futures curve averaged about -$1 per barrel for the five-trading-days ending August 26, almost $7 per barrel lower than the five-trading-day-period ending June 26 (Figure 3). This is in contrast to the steep $8-per-barrel backwardation in the Brent futures curve during August 2013, when global inventories declined and geopolitical risks were higher.
OPEC crude oil supply disruptions averaged 2.5 million bbl/d in July and August, 0.2 million bbl/d lower than the previous two-month average but 0.5 million bbl/d higher than the same time last year, mainly due to an escalation in disruptions to Libya's production since late-July 2013 (Figure 4). Unplanned supply disruptions among non-OPEC producers averaged 0.6 million bbl/d in July and August, almost 0.1 million bbl/d lower than the previous two-month average and almost 0.4 million bbl/d lower than the same time last year, as there were no outages in the United States, Canada, China, and North Sea and fewer outages in Brazil in July and August compared with the same time last year (Figure 5). EIA's estimates of unplanned outages account for all liquid fuels among non-OPEC producers, but include crude oil only among OPEC producers. These estimates of unplanned outages exclude normal maintenance and reflect the level of volumes shut in relative to an assessment of effective production capacity, which is periodically updated.
Iran's petroleum and other liquids production averaged 3.3 million bbl/d in July and August, of which 2.8 million bbl/d was crude oil. Iran's liquid fuels production remains below the previous three-year average of 3.6 million bbl/d, but 0.1 million bbl/d higher than the year-ago level of 3.2 million bbl/d. Iran's petroleum and other liquids production declined by 0.1 million bbl/d compared with the previous two-month period because of maintenance at gas processing facilities that curtailed non-crude oil production.
EIA has revised the preliminary estimates of petroleum and other liquids consumption and production for May and June 2014 published in the previous edition of this report. Global petroleum and other liquids consumption was revised downward by 0.1 million bbl/d to average 91.2 million bbl/d, while global production was unchanged at 91.6 million bbl/d, resulting in a global oil inventory build of 0.3 million bbl/d.
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