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Oil Market Report - September 2016

In September 2016 the crude oil market continued side trading within a narrower than a month before range of $44-50 per bbl. To be more precisely, Brent crude oil spot price grew in the reporting month by $1.5 per bbl or 3.3% mom, while WTI Cushing crude oil rose in price by as much as $3.5 per bbl or 7.9% mom. Nevertheless, the monthly average Brent spot price in September was nearly the same as in August. Despite to massive speculations about possible «oil freeze deal» and rather unexpected Fed’s decision to keep the rate unchanged, the effective monthly trade range of Brent spot price shrank to less than $6 per bbl in comparison with more than $10 per bbl range in August.

The same time contango in oil futures in September rose significantly. In particular, 12-months futures to spot spread in Brent crude oil increased by $1.9 per bbl to $6.1 per bbl, the highest level since the end of July 2016. The same is true for other calendar spreads. It seems that the main reason behind this contango expansion in September was increasingly strong expectations that OPEC will be able to make a deal and to ceil its oil output. And these expectations became true after the meeting in Algiers in 26-28 of September, where main OPEC oil producers and Russia reached the general agreement to limit crude oil supply and by that to help the oil market to be balanced.

Notwithstanding we see two main problems of the Algiers agreement. Firstly, this is too general agreement with intention to discuss parameters further at the November OPEC meeting. But the devil is in the details! There is a considerable probability that, say, Saudi Arabia and Iran will not be able to agree on the exactly production quotes. Secondly, crude oil production of combined OPEC and Russia facilities in September reached new record highs, so it has a little sense to freeze output at these levels to speed up crude oil market balancing.

Total OPEC crude oil production in September grew by another 0.5% mom or 170 thsd bbl / d to new record high of 33.75 mln bbl / d. The largest contribution to this output increase was made by Nigeria (+110 thsd bbl / d), Libya (+80 thsd bbl / d) and Iraq (+60 thsd bbl / d), while Saudi Arabia and Angola slightly reduced output by 60 and 40 thsd bbl / d respectively.

Crude oil production in the USA in September decreases by 0.3% to August and by 629 thsd bbl / d or 6.9% to September 2015. Production of shale oil in the US in September reduced insignificantly comparing to August, but the annual decline rate was much higher and equal to 12.8% yoy or 606 thsd bbl / d. The most output contraction among shale deposits was observed on the Eagle Ford deposit, where output fell both on m-o-m and y-o-y basis by 2.0% and 28.8% respectively.

The Energy Intelligence Group (EIG) in September published comprehensive data on world crude oil production for the previous month. According to this data total crude oil output in non-OPEC states in August grew by 0.3% mom to 47.80 mln bbl / d. So August became the 3rd month in a row of non-OPEC crude oil production increase from the low of 46.94 mln bbl / d printed in May 2016. Nevertheless, non-OPEC oil production in August was significantly lower comparing to the record highs of December 2014 (49.20 mln bbl / d) and December 2015 (48.84 mln bbl / d). The most considerable production growth in August to July among the non-OPEC oil producing countries was achieved in Canada (+190 thsd bbl / d), the UK (+90 thsd bbl / d) and Brazil (+82 thsd bbl / d), while Russia was a main cutback with oil output reduce of 243 thsd bbl / d.

The International Energy Agency (IEA) had previously expected the market to show no surplus in the second half of this year. In September report, however, it mentioned that supply would continue to outpace demand at least through the first half of next year. The key demand change in this report was the erosion of 300 thsd bbl / d from the third quarter of 2016's global demand estimate, and the resulting removal of 100 thsd bbl / d from the net 2016 forecast. IEA sees oil demand growth of just 830 thsd bbl / d in the fourth quarter, 1.3 mln bbl / d this year. 

Chinese authorities highlighted figures of apparent oil demand and oil exports/imports for August. Total apparent demand for oil in China in August continued to deteriorate and contracted another 0.6% mom and 2.2% yoy so the pace of decrease accelerated to 5 months high. In absolute terms total apparent demand in China dropped to mid-2014 levels and barely exceeded 10 mbd. Imports of crude oil to China in August reached 32.85 mln metric tons (equals to 8.02 mbd), the 2nd record high ever observed.

September data on oil inventories in general was supportive for crude oil prices. In the USA total commercial crude oil stocks dropped by 26.1 mln bbl or 5.3% comparing to August, so September became the fifth month of stocks decline in a row. Crude oil inventories fell by 43 mln bbl from its peak value of 512 mln bbl printed in April 2016. However crude oil stocks in September were 10.1% higher than a year ago. So although the negative impact of excessive stocks in the USA has been weakening during some recent months, there is still evident surplus of oil there.

Total crude oil stocks stored on floating storages (including oil in transportation) in September was 12.8% less than in August 2016 and 5.2% less than a year ago. The most significant decline had a place in South East Asia (-23.2% mom), Middle East Gulf (-14.3% mom), Japan + Korea (-57.8% mom) and West Africa (-16.9% mom). The same time total stocks of refined oil products stored on floating in September climbed by 4.0% mom and 7.8% yoy.

IEA in September sounded figures of OECD commercial oil stocks behavior in July 2016. According to the report, total OECD oil inventories in July climbed by 32.5 mln bbl or 1.0% mom. The most part of the increase were the result of total oil products inventories growth by 2.1% mom, while total OECD crude oil stocks were nearly flat and added only 0.1% mom. The same time on y-o-y basis total OECD commercial oil stocks in July 2016 jumped on 196.3 mln bbl or 6.3% yoy with crude oil stocks grew by 75.1 mln bbl (+6.1% yoy) and oil products stocks increased by 127.1 mln bbl (+8.1% yoy).

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