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Oil Market Report - September 2019

EXECUTIVE SUMMARY

Crude oil prices were very volatile within September 2019 due to a large disruption in two key oil facilities in Saudi Arabia which caused a temporary outage of about 5.7 mln bbl / d of the country’s oil production. The ICE Brent prices jumped by $8.8, or about 15% in one session on 16 September as traders tried to assess the impact of the disruption on the global oil supply and balance. During the first week after attacks on oil facilities in Saudi Arabia, oil prices remained at these elevated levels, as the market was mainly driven by concerns about a supply shortage and the risk of escalating tensions in the Middle East.

However, oil prices softened in the days following, after Saudi Arabia has successfully restored production to normal levels by the end of September, while all scheduled shipments to customers were fulfilled. Oil prices declined further in late September on a fading risk premium and a faster-than-expected recovery in Saudi Arabia’s oil production, as well as signs of easing geopolitical tensions in the Middle East, while investors turned their focus to a weakening global economy and wavering oil demand amid the unsolved trade dispute between the US and China. So, the ICE Brent crude oil benchmark added just tiny $0.64/bbl or 1.1% in September 2019 and closed the month at the level of $59.85. As the shortfall of crude oil production in Saudi Arabia turned out to be short-lived, the oil market remained rather weak during two first weeks of October 2019 as well. On October 3 the price of Brent current futures dropped to below $57.0/bbl level, but retreated higher in the following days.

So far as Saudi’s had managed to fully restore the level of oil production very quick, the oil market returned to the position where it was just before the shock. Cumulative crude oil output by the OPEC as a whole in September 2019 dropped sharply due to drones struck at two Saudi Arabia’s major oil facilities on September 14. The strike on these oil facilities removed about 5% of global supplies, so despite to the fact that damages turned up to be less severe than it looked like at first glance and the kingdom fully restored its crude oil production by the end of September, monthly volume of oil production by Saudi Arabia in September 2019 was minimal for last 9 years. So it is no wonder that total cartel’s crude oil production in the month under consideration tumbled by nearly 1.6 mln bbl / d or material 5.3% mom relative to the volume of the previous month. As for other states of the OPEC then three more countries demonstrated substantial negative monthly production growth rate in the month under consideration, namely Iran, Venezuela and Angola. To be more specific, crude oil production in Iran in September 2019 contracted by 80 thsd bbl / d or 3.6% mom relative to the level of the previous month. Venezuela reduced its crude oil output by the same 80 thsd bbl / d or 10.5% mom and Angola extracted 40 thsd bbl / d or 2.9% mom less amount of oil than in the previous month.

Total oil production around the globe in September 2019 decreased by 0.8% mom or 770 thsd bbl / d in compare to the volume of the previous month. However, relative to one year ago level cumulative global crude oil production in September 2019 also contracted by 0.8% yoy or 827 thsd bbl / d. Cumulative production of oil by the non OPEC producers in September 2019 remained practically the same as it was in the previous month, monthly change was equal to -9 thsd bbl / d. However, from the year-over year standpoint the non-OPEC group of oil producers as a whole ramped up its output in September 2019 by 3.3% yoy or more than 2.0 mln bbl / d. It is obvious that such a strong divergence of yearly changes in oil production in inside and outside the OPEC is caused mainly by the OPEC+ agreement to curb oil output to support oil prices. The most substantial growth of crude oil production among non-OPEC states in September 2019 relative to the previous month again took a place in the USA, where output of crude oil expanded by 1.1% mom or 142 thsd bbl / d. Besides the USA significant monthly increase of output in the month under consideration was also observed in Brazil (+2.6% mom or +74 thsd bbl / d) and other ex-USSR group of states (+4.7% mom or +118 thsd bbl / d). The main cutback of crude oil production in September 2019 in compare to August 2019 was recorded in Canada where production of crude oil tumbled by 5.0% mom or 227 thsd bbl / d and Russia that reduced its output by 1.1% mom or 120 thsd bbl / d.

Crude oil production in the USA in September 2019 marginally increased by 50 thsd bbl / d or 0.4% in compare with the previous month. From the year-over-year standpoint crude oil production in the USA in September 2019 was formidably higher than it was one year ago in September 2018. The rate of yearly change is equal to 1.4 mln bbl / d or impressive 12.7% yoy. The share of the USA in total crude oil output worldwide increased by another 35 b.p. to 15.14% in September 2019 and for the first time in history exceeded the threshold of 15.0%. Relative to one year ago level the share of the USA in cumulative global crude oil production in the month under review grew up by impressive 1.52 p.p. Crude oil export from the USA in September 2019 grew up significantly by 6.5% mom or nearly 190 thsd bbl / d relative to the level of the previous month and returned above the threshold of 3.0 mln bbl / d. Comparing to the volume of September 2018 export of crude oil from the USA in the month under consideration skyrocketed by imposing 44% yoy or 0.94 mln bbl / d. Net import of crude oil to the USA in September 2019 dropped down even more substantially and contracted by 520 thsd bbl / d or 12.8% mom.

Total production of shale oil in the USA in September 2019 rose by another nearly 150 thsd bbl / d or 1.7% mom in compare to the value of the previous month in compliance with the most recent data provided by Rystad Energy. In comparison to one year ago figures total shale oil production in the USA in September 2019 expanded by impressive 11.5% yoy or 0.92 mln bbl / d. Due to outrunning growth of shale oil production relative to growth of overall crude output the share of shale oil in cumulative crude oil output in the USA in the month under consideration increased by 0.9 p.p. and reached 71.9%, just a little lower than the highest level in history.

In its recent monthly report the IEA have cut its headline oil demand growth number for both 2019 and 2020 by 0.1 mb/d. However, the reduction for 2019 mainly reflects a technical adjustment due to new data showing higher US demand in 2018 which has depressed this year’s growth number. This year is seeing two very different halves. In 1H19, global growth was only 0.4 mb/d but in 2H19 it could be as high as 1.6 mb/d with recent data lending support to the outlook: non-OECD demand growth in July and August was 1.0 mb/d and 1.5 mb/d, respectively, with Chinese demand growing solidly by more than 0.5 mb/d yoy. The OECD countries remain in a relatively weak state, although as we move through 2H19 yoy growth returns helped by a comparison versus a low base in the latter part of 2018. Demand is supported by prices (Brent) that are more than 30% below year-ago levels. For 2020, a weaker GDP growth forecast has seen our oil demand outlook cut back to a still solid 1.2 mb/d.

Total commercial stocks of oil and oil products in OECD states in July 2019 finally slowdown its build-up and expanded by just 0.1% mom or 1.5 mln bbl. Nevertheless, technically July became the 4th month in a row of total oil inventories growth in OECD states. However, expansion of stocks within the month under review was observed only in stocks of refined oil products, while total crude oil inventories in OECD states declined. To show the picture in greater details, total inventories of refined oil products rose in July 2019 by another 37.9 mln bbl or 2.6% mom, while total inventories of crude oil contracted by material 36.7 mln bbl or 3.3% mom the same time.

Total commercial inventories of crude oil in the USA in September 2019 demonstrated very shy negative dynamic and contracted by 0.3 mln bbl or insignificant 0.1% mom relative to the volume of August 2019. Nevertheless, September turned up to be the 4th month in a row of US crude oil inventories decline, so the figure went down to the lowest level over the last 12 months. Opposite to the volume of total commercial inventories of crude oil in the USA, the stocks of crude oil in Cushing storage in Oklahoma (the basis for NYMEX WTI crude oil futures) marginally grew up in September 2019 by 0.6 mln bbl or 1.5% mom. However, the figure in the month under report remained rather close to the lowest level over last 10 months.

Total floating crude oil stocks around the globe in September 2019 significantly contracted by 15.4 mln bbl or 25.6% mom in compare with the volume of the previous month according to the Vortexa Ltd. data. In fact, the cumulative volume of floating crude oil inventories worldwide dropped to the lowest level over last 8 months in the month under consideration. The current level of stocks is materially lower than the threshold of 50 mln bbl and rather close to the minimal level for this month of the year over last 3 years. From the standpoint of year-over-year dynamic total volume of crude oil that held of floating storages in September 2019 expanded by 5.3 mln bbl or 13.6% yoy relative to the level of September 2018.

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