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Oil Market Report - Sepember-17


Crude oil price broke through strong resistance in September and occupied higher levels (above $50 per bbl for WTI benchmark and above $55 per bbl for Brent). Unusually active hurricane season in Gulf of Mexico limited upside for U.S. oil popular benchmark WTI due to refineries closures, but Brent spot price almost got to $60 per barrel price in the end of September.

The question now is how strong OPEC deal really is to rebalance the market next year. Saudi Arabia and its close allies tried to overcome Nigeria and Libya production return. With the help of healthy summer gasoline demand significant drawdowns in U.S. commercial oil storage levels were actually achieved.

Meanwhile U.S. shale oil production has some signs of slowdown: producers prefer to leave drilled wells uncompleted possibly due to logistic, service constraints or in anticipation of higher prices. EIA monthly reports have been showing about 100-130 thsd bbl /d lower actual numbers for U.S. oil production comparing to their weekly estimates.

Drilling activity remains at the very high level though. According to DrillingInfo assessments, U.S. oil companies drilled 554 thsd bbl / d of new production capacities in August (+6.3% m-o-m and +127% y-o-y), the level has not been seen since January 2015. Given such high activity, U.S. oil production could surpass its 2015 maximum if all the drilled recently wells had been completed and not stockpiled. In any case, U.S. shale production remains as considerable pressure on crude oil price, especially American benchmark WTI.

August output of Brent, Forties, Oseberg and Ekofisk in the North Sea was at three-year low of 716 thsd bbl / d, according to monthly loading programs. Likely the reason behind substantial backwardation in Brent futures curve and widened premium of Brent to WTI above $6 per bbl. Output in November is expected to be down by 10% comparing to last year to 800 thsd bbl / d, declining from 870 thsd bbl / d in October.

Export volumes from the USA to Europe could lower premium of Brent to WTI. Last weekly data from EIA suggests that exports reached record level of 2 mln bbl / d. Small part of this is aimed to Europe. It might be enough though to ease tightness in local European crude oil market.    

In its monthly report OPEC acknowledged that the group’s crude production reached 32.7m b/d in September, higher by 88,500 b/d compared to August numbers. The output increase was led by Nigeria and Libya – the two members exempt from the output deal.

Growth in demand for the next year was increased to 1.4 mln bbl / d. Meanwhile production growth from non-OPEC countries was decreased by 100 thsd bbl / d for this year to 700 thsd bbl / d and by 60 thsd bbl / d for the next year to 900 thsd bbl / d.

As a result, expectations for the demand on its own crude oil in 2018 was revised higher by roughly 200 thsd bbl / d to 33.06 mln bbl / d. Evidently, to achieve normalization in balance OPEC need output cut deal to be prolonged to the all next year and include Libya and Nigeria in the deal. 

According to EIA Short-Term Outlook in October, global oil inventories fell by 0.5 mln bbl / d in the third quarter of 2017. This draw marked the third consecutive quarterly draw, the longest such stretch since 2013–14.

Economic conditions appear to be strengthening globally, which could contribute to oil demand growth in 2018. However, EIA sees demand growth in 2018 lower by 110 thsd bbl / d than in prior outlook, leaves 2017 world demand growth unchanged.

Forecast for non-OPEC oil production growth in 2018 was revised lower by 220 thsd bbl / d to 0.64 mln bbl / d.

As a result, EIA expects oil market to be in deficit of 0.32 mln bbl / d in 2017 (previously balanced) and lower surplus in 2018 (0.18 mln bbl / d instead of 0.33 mln bbl / d.

Interestingly, U.S. oil production expectations for the end of 2018 were improved to 10.17 mln bbl / d from 10.09 mln bbl / d. For December 2017 U.S. oil production forecast remained unchanged at 9.69 mln bbl / d.  

IEA also announced its vision of crude oil market supply/demand balance in their monthly report in October:

1) OECD commercial stocks fell 14.2 mln bbls in August. The surplus over the five-year average fell to 170 mln bbls. Preliminary September data marked oil stocks draw everywhere: in Europe storage levels fell by 11.8 mln bbls, in Japan declined by 2.3 mln bbls, in US plunged by 15 mln bbls due to hurricanes, in Singapore and in Fujairah dropped by 6.3 mln bbls and 2.3 mln bbls respectively. Global stocks are likely to have drawn in 3Q17 as reductions in floating storage and the OECD outweighed net builds in China.

2) Global oil demand growth forecasts remained unchanged at +1.6 mln bbl / d for 2017 and +1.4 mln bbl / d for 2018.

3) Non-OPEC crude oil supply is expected to rise by 700 thsd bbl / d in 2017 and by 1.5 mln bbl / d in 2018, led by U.S. U.S. crude oil production to grow 470 thsd bbl / d in 2017 and by +1.1 mln bbl / d in 2018.

4) As a result, the IEA sees oil market in small deficit this year, but surging non-OPEC output in 2018 means that stocks do not drop next year.

5) Global Oil supply rose 90 kb/d in September to 97.5 mb/d. Output stands 620 kb/d higher than last year

6) Combined oil output in Libya and Nigeria is up 730 thsd bbl / d from springtime lows, diluting OPEC supply cuts.

7) Northern Iraq and Kurdish crude oil exports continue apace via pipeline to Ceyhan despite Turkey threat of closure.

8) Iraq oil output rose 30 thsd bbl / d in September to 4.52 mln bbl / d, taking compliance with OPEC deal down to only 20%.

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