OPEC 2016: MORE OIL
Oil market highlights
Crude Oil Price Movements
The OPEC Reference Basket fell below $50/b in August to average $45.46/b, mostly attributed to sell-offs amid enduring oversupply and Chinese economic turbulence. Crude oil futures plunged sharply again to multi-month lows, with ICE Brent ending at $48.21/b and Nymex WTI at $42.89/b. Speculators continued to be bearish in August with net-long positions in oil futures and options at record lows. The Brent-WTI spread narrowed about 52¢ to $5.32/b in August.
World economic growth has been revised down to 3.1% for 2015 and to 3.4% for 2016. While OECD growth remains unchanged at 2.0% for 2015 and 2.1% in 2016, major emerging economies are increasingly facing challenges. China's and India's growth forecasts have been revised down by 0.1 percentage points to now stand at 6.8% and 6.4% for China and at 7.4% and 7.6% for India in 2015 and 2016, respectively.
World Oil Demand
In 2015, world oil demand growth is expected to be around 1.46 mb/d after an upward revision of around 84 tb/d, mainly to reflect better-than-expected data from OECD region. In 2016, world oil demand is anticipated to rise by 1.29 mb/d after a downward revision of around 50 tb/d.
World Oil Supply
Non-OPEC oil supply is expected to grow by 0.88 mb/d in 2015, following a downward revision of around 72 tb/d, due to lower-than-expected output in the US. In 2016, nonOPEC oil supply is expected to increase slightly by 0.16 mb/d, a downward revision of 110 tb/d from the previous report. OPEC NGLs are expected to grow by 0.19 mb/d in 2015and 0.17 mb/d in 2016. In August, OPEC crude production averaged 31.54 mb/d, according to secondary sources.
Product Markets and Refining Operations
Product markets in the Atlantic Basin showed a mixed performance. Bearish sentiment, fueled by the approaching end of the driving season, caused US refinery margins to drop, while in Europe, margins remained healthy on the back of some recovery in the middle of the barrel. Asian margins showed a slight recovery in middle distillates on strong regional demand amid some run cuts, partially easing concerns over product oversupply.
Bearish sentiment dominated the dirty tanker market in August with freight rates for VLCCs, Suezmax and Aframax registering a drop from the previous month. Freight rates declined, mainly as a result of tonnage availability while tonnage demand remains limited. Average clean tanker freight rates were down, mainly on the back of lower freight rates and market activity in west of Suez. In August, OPEC spot fixtures rose to average 12.20 mb/d, and OPEC sailings increased to stand at 24.11 mb/d.
OECD commercial oil stocks rose further in July to stand at 2,925 mb. At this level, they were 202 mb higher than the latest five-year average, with crude and products indicating a surplus of around 163 mb and 39 mb, respectively. In terms of days of forward cover, OECD commercial stocks stood at 63.3 days, 4.8 days above the latest five-year average.
Balance of Supply and Demand
Demand for OPEC crude is estimated at 29.3 mb/d in 2015, 0.1 mb/d higher than the previous assessment and up by 0.4 mb/d from the previous year. In 2016, required OPEC crude is projected at 30.3 mb/d, 0.2 mb/d higher than the previous month's assessment, and around 1.0 mb/d above the estimated level of this year.
Review of developments in the world economy
The trend of the past years' moderate global growth is likely to continue. Recent world economic developments have caused the GDP growth forecast to be revised lower to stand at 3.1% in 2015 and it is expected to rise only modestly to 3.4% in 2016. While the group of emerging and developing economies has been the main growth engine in recent years, it has become clear that growth in this group is slowing down. OECD economies are holding up well and are forecast to grow by 2.0% in the current year and by 2.1% in 2016 (Graph 1). While upside potential remains, the many uncertainties in the global economy in the current and next year have skewed the growth risk slightly to the downside. Nevertheless, global oil-demand growth, benefitting also from low oil prices has strengthened since the initial forecast, which may continue for the remainder of the year (Graph 2).
Within the OECD group of countries, growth in the US is forecast to remain solid, with improvements in the labour market to continue. Consequently, US GDP growth has been revised up to 2.5% from 2.4% previously. Low productivity and recently lower industry utilization rates, however, remain a drag on the economy. Moreover, the expectation of reaching the federal government's debt ceiling towards the end of the year will, as in the past, pose some uncertainty to the economy. In the Euro-zone, growth was slightly softer than expected in the past months and while the recovery continues, the region's ongoing sovereign debt issues and elections in some important economies raise uncertainty for the region. In addition, the slowing growth trend in China may also impact the Euro-zone's two largest exporters, Germany and France. This is also applicable to Japan, which has close trading ties with China, and which has led to a downward revision of Japan's 2015 GDP growth from 1.2% previously, to now stand at 0.8%. Moreover, the necessity of Japan to continue improving its debt situation may lead to repeated tax increases in the coming year, which may dampen economic growth again.
Of the four major emerging economies, Brazil and Russia are in recession this year and Brazil's GDP is forecast to contract in 2016. While China continues to grow, it is forecast to grow at a slower pace of 6.8% in 2015 and 6.4% in 2016. So far signs of China recently moving towards a floating exchange rate regime, along with the past weeks' stock market developments, have not severely impacted the real economy. However, overcapacity, capital outflows and new financial market movements are more likely to impact China's economy. India, on the other hand, constitutes an exception, as growth is forecast to rise in 2016 to 7.6% from 7.4% in the current year, while 2Q15 growth has been lower than expected.
All in all, the importance of monetary decisions will also play a key-role in the near future. The decision of the US Fed regarding the timing and the magnitude of an interest rate hike may turn out to be an important factor for the global economy – particularly, as the ECB and the BoJ, and, recently, China's central bank, embark on a different strategy, i.e. increasing monetary support. This, together with the uncertainties about China's growth level has had a significant impact on currency markets, especially on emerging market currencies, which ultimately affect the oil-market.
Despite moderate economic growth, recent data shows better-than-expected oil-demand in the main consuming countries. This is mainly driven by lower oil prices. At the same time, US oil production has shown signs of slowing. This could contribute to a reduction in the imbalance of oil market fundamentals, however, it remains to be seen to what extent this can be achieved in the months to come.
Considering the latest softening developments in the global economy, global economic growth has been revised down by 0.1 percentage points (pp) for both 2015 and 2016. In the current year, the global economy is forecast to expand by 3.1%, followed by growth of 3.4% in the next year. The challenges in emerging and developing economies in particular have become more accentuated in the past weeks. China's slowdown has become more pronounced, and Brazil and Russia are now both forecast to face a considerable recession this year. Some support to global growth may come from a healthy trend in India. Also, the OECD is forecast to hold up well at 2.0% this year and 2.1% in the coming year. While some upside potential – mainly from the OECD and India – might lead to higher global growth, numerous uncertainties exist. Most importantly, the decelerating momentum in China, and the declining trend in Russia and Brazil will need close monitoring. Moreover, some fragility in the Euro-zone remains and the strength of the US growth trend remains to be seen. Japan will need to manage a balancing act involving fiscal tightening and, at the same time, stimulating its economy. Geopolitical issues and their potential spill-over into the real economy also constitute a challenge. Finally, central bank policies will be an influential factor, amid lower global inflation, most importantly the US Fed's interest rate decision in the coming months.
Emerging and Developing Economies
Brazil's major macroeconomic indicators have been consistently pointing to the downside since the beginning of the year. GDP contracted 2.6% y-o-y in 2Q15, following a drop of 1.6% in 1Q15. The Brazilian real lost nearly one-third of its value against the dollar since the beginning of the year and inflation has remained on a notably upwards trend since January. The consumer confidence index summarizes the country's recent economic momentum, breaking low records in each of the past eight months. GDP is now anticipated to contract by 2.0% in 2015, compared to last month's forecast of just -1.3%. Looking ahead, GDP in 2016 is projected to shrink by 0.3% compared to the growth of 0.7% expected last month.
In Russia, the latest data demonstrates further economic deceleration. GDP shrank 4.6% y-o-y in 2Q15, following a 2.2% drop in 1Q15. Retail sales in July were in the contraction territory for the seventh consecutive month, while the manufacturing sector is showing no signs of recovery. As a result, GDP growth expectations are slightly lower this month, forecast to contract 3.0% in 2015. The forecast for 2016 points to growth of around 0.8%.
India's GDP growth moderated to 7.0% y-o-y in 2Q15, falling slightly from 7.5% in the 1Q15. This was weaker than markets had anticipated and strengthens the case for additional monetary stimulus. Domestic demand has failed to pick up in any notable fashion: investment is slightly better, but consumer spending has slowed. Combined with a persistent weakness in exports, this makes for a less sanguine near-term outlook. In addition to the growth figures, GDP deflator data shows little in the way of broad inflationary pressures on the economy. The Reserve Bank of India (RBI) has room to – and indeed should – provide another dose of monetary stimulus.
Evidence of the Chinese economic slowdown has been abundant, even from the government's own data. The Chinese economy is threatened by overcapacity nd it seems the producer price index is showing a 41-month negative number. The latest survey data indicated that operating conditions faced by Chinese manufacturers continued to deteriorate in June, albeit at a weaker rate. But it seems the Peoples' Bank of China (PBOC) wants to support economic growth in the mid-term through monetary easing. For this reason, the PBOC announced it would cut benchmark interest rates by 25 basis points (bp) effective 26 August.
World Oil Demand
World oil demand growth in 2015 was revised upward by around 84 tb/d as a result of better-than-expected performance from OECD America and Europe in 1H15. As a result, 2015 world oil demand growth currently stands at 1.46 mb/d, leading to total global consumption of 92.79 mb/d. In contrast, world oil demand growth in 2016 was revised downward by 50 tb/d due to the projected slower economic momentum in Latin America and China. World oil demand growth is now anticipated at 1.29 mb/d, leading to total global consumption of around 94.08 mb/d.
World Oil Supply
Non-OPEC oil supply is estimated to have averaged 57.43 mb/d in 2015, revised down by 33 tb/d in absolute volume from the previous Monthly Oil Market Report (MOMR), while y-o-y growth was revised down by 72 tb/d to average 0.88 mb/d.
Non-OPEC supply growth was revised down, due to a downward revision in US oil production growth by 0.17 mb/d, in which 1H15 was revised down by an average of 0.07 mb/d based on a new production estimation methodology adopted by the US Energy Information Administration (EIA). Meanwhile, there have been upward revisions in certain countries. At the same time, non-OPEC historical data in 2014 was revised up by 40 tb/d to average 56.55 mb/d. OECD Americas is expected to be the main driver of growth, increasing by 0.67 mb/d in 2015. Non-OPEC oil supply is projected to grow by 0.16 mb/d in 2016, down by 0.11 mb/d from the previous assessment, to average 57.59 mb/d, mostly on the back of Brazil's lower estimation and the US reduction carried over from 2015.
OPEC NGLs and non-conventional liquids grew by 190 tb/d to average 6.01 mb/d in 2015, and they are also forecast to grow by 0.17 mb/d to average 6.18 mb/d in 2016. In August 2015, OPEC crude oil production increased by a marginal 13 tb/d to average 31.54 mb/d, according to secondary sources. As a result, preliminary data indicates that world oil supply decreased by 0.53 mb/d in August to average 94.62 mb/d.
Balance of Supply and Demand
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