DECEMBER OIL MARKET REPORT

Oil prices continued to plunge in November and into early December. The selloff gained pace after OPEC on 27 November decided to keep its output target unchanged. ICE Brent was last trading at a five-year low of $64.05/bbl, down more than 40% from June, and NYMEX WTI at $60.45/bbl.

The outlook for global oil demand growth for 2015 has been cut by 230 kb/d to 0.9 mb/d on lower expectations for the FSU and other oil-exporting countries. A strong dollar and the lifting of subsidies have so far limited supportive price effects on demand, which is now seen reaching 93.3 mb/d next year, from 92.4 mb/d in 2014.

Global production fell by 340 kb/d in November to 94.1 mb/d on lower OPEC supplies. Annual gains of 2.1 mb/d were split evenly between OPEC and non-OPEC. Surging US light tight oil supply looks set to push total non-OPEC production to record growth of 1.9 mb/d this year, but the pace is expected to slow to 1.3 mb/d in 2015.

OPEC crude supply declined by 315 kb/d in November to 30.32 mb/d after Libya's recovery stumbled, but stood 765 kb/d higher year-on-year. The 'call on OPEC crude and stock change' for 2015 has been revised down by 300 kb/d to 28.9 mb/d. The 'call' is expected to decline seasonally by 1.2 mb/d from 4Q14 to 1Q15.

Global refinery crude throughputs bounced back in November from a seasonal low of 76.8 mb/d in October. The estimate of 4Q14 throughputs has been revised sharply higher since the last Report, to 78 mb/d, as refiners apparently took advantage of healthy margins ahead of a flurry of refinery start-ups expected in early 2015.

OECD industry stocks built counter-seasonally in October to 2 720 mb, their highest level in more than two years. Stocks ended at a surplus to their five-year average for the first time since March 2013. Rising crude supply and peak seasonal refinery maintenance saw crude stocks surge by 34.4 mb and product stocks fall by 30.7 mb.

As oil prices keep plunging, projections of short-term supply and demand balances stay the same - more or less - in the wake of OPEC's decision last month to leave its production target unchanged. Since the last Report, futures benchmark prices fell by another $15/barrel, with Brent last trading near $65/barrel and WTI in the low $60s, 40% below their June highs. Several years of record high prices have induced the root cause of today's rout: a surge in non-OPEC supply to its highest growth ever and a contraction in demand growth to five-year lows.

Barring a disorderly production response, it may well take some time for supply and demand to respond to the price rout. Here's why.

When it comes to supply, lower oil prices are already slashing producers' spending, but this is more likely to affect medium- and long-term output than short-term supplies. So long is the lead of oil projects that price swings can take time to work their way through to supply. Projects that have already been funded will for the most part go on. Non-OPEC supply growth for 2015 will not come close to its 2014 record, but prices have little to do with it - as things stand now. The short-term outlook for US light tight oil production remains unchanged at current prices as long as producers maintain access to financing. Only in Russia is oil's plunge, along with sanctions and a collapsing currency, likely to trim 2015 production plans. A lower forecast of Russian supply is offset, however, by upward revisions to North American projections in view of the latest production data.

As for demand, oil price drops are sometimes described as a "tax cut" and a boon for the economy, but this time round their stimulus effect may be modest. For producer countries, lower prices are a negative: the more dependent on oil revenues they are and the lower their financial reserves, the more adverse the impact on the economy and domestic demand. Russia, along with other oil-dependent but cash-constrained economies, will not only produce less but is likely to consume less next year.

In oil-importing countries, price effects are asymmetrical: Demand lost to substitution or efficiency gains during prolonged periods of high prices will not come back in a selloff. Several governments are wisely taking advantage of the price drop to cut subsidies. Consumers thus might not see much of the decline. The dollar's strength and oil sale taxes in some countries will also limit the feed-through from crude oil to retail product prices. In the OECD, a tepid economic recovery, weak wage growth and - last but not least - worrying deflationary pressures will further blunt the stimulus of lower prices.

Based on current projections of still relatively weak demand growth and robust supply, global oil inventories would notionally build by close to 300 mb in 1H15 in the absence of disruption, shut-ins or cut in OPEC production. If half of this took place in the OECD, stocks there would approach 2 900 mb and possibly bump against storage capacity limits. The resulting downward price pressure would raise the risk of social instability or financial difficulties if producers found it difficult to pay back debt.

Meanwhile OECD refining margins, which gained from lower feedstock costs in 4Q14, will likely come under downward pressures in 1Q15, as product stocks rebuild in the wake of surprisingly strong runs and as much as 1.4 mb/d of new refining capacity comes online.

Continued price declines would for some countries and companies make an already difficult situation even worse. Today's oil spending cuts will dent supply - just not right now.

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