Wednesday, January 10, 2017
Oil prices edged higher on Tuesday, with U.S. crude touching its highest since December 2014, supported by OPEC-led production cuts and expectations that U.S. crude inventories have dropped for an eighth week in a row. Bullish sentiment wasn’t even dented by the EIA raising its 2018 U.S. crude output forecast, along with their expectation that OPEC output will rise by 200,000 bpd this year.
Both the International Energy Agency (IEA) and OPEC agree that in 2017 strong demand and output cuts by the cartel and its partners have eliminated a sizeable portion of excess global inventories. According to the IEA, surplus crude oil stocks in developed nations fell from 291 million barrels in November 2016 to 111 million barrels in October 2017.
However, their outlooks as to what happens next differ substantially. OPEC projects that in 2018 global demand will grow by 1.53 million bpd and non-OPEC supplies will expand by 1.0 million bpd, with increased demand exceeding rising supply by about half a million bpd. IEA forecasts that next year global demand will grow by 1.3 million bpd and non-OPEC supplies will surge by 1.6 million bpd, with rising supply surpassing higher demand by approximately 300,000 bpd. Consequently, OPEC predicts rebalancing and excess inventory depletion will be complete by late next year and IEA forecasts global inventories rising by 200,000 bpd in the first half of 2018, falling by 200,000 bpd in the second half and excess worldwide stocks budging little if at all. EIA forecasts global inventories growing by 200,000 bpd in the first half of next year, with a supply overhang of 167,000 bpd for all of 2018.
OPEC believes in strong growth of oil demand; the IEA and the EIA believe in strong growth of non-OPEC supplies. Let’s examine the 2018 demand growth outlook. According to Reuters, in 2017, the crude oil “demand story was dominated by China. China’s crude oil imports were [up about 12 percent] in the first 11 months of 2017 against the same period in 2016. This makes China the major contributor to demand growth. Thus, what happens to Chinese import demand is going to play a major role in how the global supply-demand balance turns out in 2018. Last year, crude imports were driven up by China’s record-pace filling of its strategic storages, demand from smaller non-state refiners and by increased exports of refined products. All three of these dynamics are still at play, but it would be surprising if the 12 percent gain … is repeated. A return to single digit growth is more likely. Near-term support comes from new refining capacity being brought online and Beijing allowing more independent refiners to import crude.” Near-term headwinds are China closing in on filling its available SPR storage tanks and current higher oil complex prices inevitably resulting in lower oil demand growth. Recent examples of the latter are U.S. gasoline consumption slowing from 2016 to 2017, due to higher pump prices, and a slowing of Chinese SPR stockpiling in the second half of last year, as crude prices increased.