IEA: OIL SUPPLY ISSUES
IEA - OPEC oil ministers and ten non-OPEC oil ministers have met and agreed to achieve 100% compliance with the Vienna Agreement (i.e. they will increase production). What this means in terms of volume and timing remains to be seen as the official communique contained little detail, but there are already indications from leading producers, particularly Saudi Arabia, its Gulf allies, and Russia, that production is climbing and may reach record levels. Such determination to ensure the steady supply of oil to world markets in the face of multiple challenges to stability is very welcome. The prospect of higher supply might be thought to have sent oil prices down, but in fact WTI prices have risen close to levels not seen since November 2014 and Brent prices have recently made a renewed attempt to reach $80/bbl. Higher prices are prolonging the fears of consumers everywhere that their economies will be damaged. In turn, this could have a marked impact on oil demand growth.
That prices have remained relatively high reflects various supply concerns, some of which will be with us for some time to come, e.g. Iran and Venezuela, and others that are probably shorter term. The clearly expressed determination of the United States to reduce Iran's exports by as much as possible suggests that shipments could be reduced by significantly more than the 1.2 mb/d seen in the previous round of sanctions. In June, Iran's crude exports fell back by about 230 kb/d, albeit from a relatively high level in May, as European purchases dropped by nearly 50%. Most of Iran's oil goes to Asia, however, with China and India currently taking over 600 kb/d each. When you also consider that both China and India are exposed to Venezuela, importing respectively 250 kb/d and 325 kb/d, it is clear that the world's second and third biggest oil consumers could face major challenges in sourcing alternative compatible barrels.
The re-emergence of Libya as a risk factor in global supply follows a series of attacks on key infrastructure that saw production plummet to around 500 kb/d in July from close to the 1 mb/d level seen for about a year. At the time of writing, the situation seemed to be improving, but we cannot know if stability will return. The fact that so much production is vulnerable is clearly a cause for concern. Incidentally, China receives nearly 140 kb/d of oil from Libya. Two other supply disruptions are likely to be short-lived. In Alberta, 360 kb/d of output from Syncrude's heavy crude upgrading facility was shut-in from 20 June and in the North Sea oil production fell sharply in May by nearly 360 kb/d and output likely remained constrained due to summer maintenance and strike action in Norway. In addition, Brazilian production growth so far in 2018 has been lower than expected. At the same time, refiners' thirst for crude oil will remain high during the summer period before seasonal maintenance kicks in.
Some of these supply issues are likely to be resolved, but the large number of disruptions reminds us of the pressure on global oil supply. This will become an even bigger issue as rising production from Middle East Gulf countries and Russia, welcome though it is, comes at the expense of the world's spare capacity cushion, which might be stretched to the limit. This vulnerability currently underpins oil prices and seems likely to continue doing so. We see no sign of higher production from elsewhere that might ease fears of market tightness. Indeed, our overall growth outlook for non-OPEC production in 2018 has been reduced slightly to 1.97 mb/d, although in turn our 2019 growth estimate shows a modest increase to 1.84 mb/d. On the demand side, although there are emerging signs of reduced economic confidence, and consumers are unhappy at higher prices, we retain our view that growth in 2018 will be 1.4 mb/d, and about the same next year.
The northern hemisphere summer promises to be anything but quiet as markets adjust to the ever-changing geopolitical and physical climate. We continue to be in a close dialogue with major producers and consumers, both inside and outside the IEA family, and are monitoring market developments in order to be prepared to advise on any support that might be needed.
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U.S. FRB - Industrial production edged up 0.1 percent in July after rising at an average pace of 0.5 percent over the previous five months. Manufacturing production increased 0.3 percent, the output of utilities moved down 0.5 percent, and, after posting five consecutive months of growth, the index for mining declined 0.3 percent. At 108.0 percent of its 2012 average, total industrial production was 4.2 percent higher in July than it was a year earlier. Capacity utilization for the industrial sector was unchanged in July at 78.1 percent, a rate that is 1.7 percentage points below its long-run (1972–2017) average.
NPD - Preliminary production figures for July 2018 show an average daily production of 1 911 000 barrels of oil, NGL and condensate, which is an increase of 64 000 barrels per day compared to June.
GAZPROM NEFT - For the first six months of 2018 Gazprom Neft achieved revenue** growth of 24.4% year-on-year, at one trillion, 137.7 billion rubles (RUB1,137,700,000,000). The Company achieved a 49.8% year-on-year increase in adjusted EBITDA, to RUB368.2 billion. This performance reflected positive market conditions for oil and oil products, production growth at the Company’s new projects, and effective management initiatives. Net profit attributable to Gazprom Neft PJSC shareholders grew 49.6% year on year, to RUB166.4 billion. Growth in the Company’s operating cash flow, as well as the completion of key infrastructure investments at new upstream projects, delivered positive free cash flow of RUB47.5 billion for 1H 2018.
REUTERS - Front-month Brent crude oil futures LCOc1 were at $72.34 per barrel at 0648 GMT, down by 12 cents, or 0.2 percent, from their last close. U.S. West Texas Intermediate (WTI) crude futures CLc1 were down 23 cents, or 0.3 percent, at $66.81 per barrel.