KUWAIT: Oil prices failed to recover after a free fall that started last month pushing prices down to a four-month low level. The decline was mainly related to softer demand projections led by the US-China trade war coupled with increasing supplies from the US that continued to undermine OPEC’s efforts. As a result, the OPEC+ producers are almost certain to extend the ongoing production cut agreement until year end to support prices and to balance the oil market. In addition, last week’s tanker attacks in the Gulf of Oman had only a minimal and temporary impact on oil prices showcasing investor concerns about the persistent supply/demand gap in the market. Economic indicators continue to show signs of faltering growth as seen from the report from OECD as well as fresh signs of weakness in Chinese economy.
In its monthly report, the IEA slashed global oil demand outlook for the second consecutive month highlighting escalating trade tensions. According to the report, world oil demand growth is now expected to reach 1.2 mb/d in 2019 and is expected to grow slightly to 1.4 mb/d in 2020. Demand trends this year were weak since the start of the year due to factors that include warmer winter in the northern hemisphere, slowdown in the petrochemicals industry in Europe and slow US gasoline and diesel demand.
However, the IEA expects the second half of the year to show impressive demand growth backed by government incentives to boost economic growth. This concurred with Saudi Arabia’s Energy Minister who recently said that higher seasonal oil demand during the second half of the year would help to balance the oil market.
On the other hand, in its latest Short Term Energy Outlook, the US EIA slashed oil price forecast for this year to an average of $67 per barrel, down $3 per barrel from its last month’s forecast. The forecast for 2020 is also flat at $67 a barrel of Brent crude. The agency also lowered US oil production forecast by 140 tb/d for 2019 to reach 12.32 mb/d as output has remained stable at around 12 mb/d over the last few weeks. The agency’s weekly report showed an increase in inventories in the US by 2.2 million barrels for the week ended 7-June-19. US crude inventories have risen by 19 million barrels over the last five weeks with four out of five weeks showing weekly increases.
Oil production by OPEC countries remained flat month-on-month primarily due to lower output in Iran along with Nigeria while production by Venezuela remained subdued at around 0.8 mb/d. Monthly production by the group stood at 30.26 mb/d in May-19, the lowest level since 2014. According to Bloomberg, OPEC+ compliance to the production cut agreement stood at 143 percent during May-19, a slight decline from the previous month. The group is expected to meet during the first week of July-19 to decide on the future course of the agreement. Saudi Arabia’s Energy Minister expressed hope that the producers would be able to balance the market before next year.
After touching yearly peak by mid-May-19, oil prices saw consecutive declines during the following weeks that continued during the first half of June-19 pushing prices to the lowest since Jan-19. Both supply and demand side factors affected prices during the month while the regional geopolitical issues in the MENA region only provided temporary support to prices. The pressure on the global economic front were reflected in a number of data released over the past few months that affected oil demand since the start of the year. Monthly manufacturing activity in the US dipped to the lowest in almost a decade as seen from PMI index. On the other hand, China’s manufacturing contracted during May-19 as new orders declined due to the ongoing tariff war with the US. Germany’s manufacturing PMI also dropped although the overall IHS Markit Eurozone Composite PMI rose in May-19 sending negative signal for oil demand in the near term.
Meanwhile, US oil drillers have also scaled back operations anticipating pressure on oil prices. According to a Bloomberg report, oil drilling in the Permian Basin was the lowest since early last year. This was also reflected in Baker Hughes weekly rig count data that showed a decline of one oil rig last week to reach 788 following a much larger decline of 11 rigs in the previous week. Nevertheless, worldwide rig count data continued to show growth during May-19 recording a month-on-month growth of 42 rigs in May-19 to reach 2,182 rigs. Average crude prices during May-19 showed decline across the board as first half gains were more than offset by declines during the second half of the month. Average OPEC crude prices dropped 1.1 percent m-o-m during May-19 to reach $70.0/b. Kuwait crude average price declined at a slightly higher pace of 1.6 percent to reach $70.1/b, while average Brent crude saw the smallest decline of 0.4 percent to reach $70.9/b.
World oil demand
OPEC lowered its world oil demand growth expectations in its latest monthly report. According to the new estimates, demand is expected to rise by 1.14 mb/d, a decline of 0.07 mb/d from last month’s estimate, to reach 99.86 mb/d in 2019. The revision reflected a decline in demand in almost all the OECD countries during Q1-19. Demand data for OECD Americas was lowered by 0.15 mb/d due to sluggish oil demand data from the US and Canada in March-19 due to decline in gasoline requirements in the US and softening light distillate demand in Canada. Demand in OECD Asia Pacific was lowered 0.13 mb/d due to planned and unplanned petrochemical shutdowns during Q1-19.
OECD Europe data was also lowered led by slower-than-expected oil demand from Germany, Italy, and Turkey. The monthly data for March-19 for the US showed declining gasoline demand resulting in a aggregate m-o-m decline of 1.8 percent. The decline was seen in the road transportation sector despite a growth in new car registrations. That said, demand during Q1-19 remained positive in the US as compared to last year. Preliminary data for April-19 and May-19 showed positive trend backed by higher demand for industrial fuels. Data until April-19 for the European Big 4 countries showed rising demand for a majority of petroleum products as compared to last year backed by colder weather conditions and a low base effect. Auto sales continue to remain sluggish in large part of Europe declining by 2.5 percent since the start of the year. In the OECD Asia Pacific region, Japan recorded the first monthly increase in April-19 on the back of higher jet/kerosene consumption led by higher airline activity and colder weather conditions. Gasoline demand remained flat as compared to last year after declining for 14 consecutive months while LPG recorded the biggest decline during the month. In the Non-OECD region, Chinese oil demand continue to remain positive increasing by 0.21 mb/d in April-19 led by higher demand for transportation fuels that increased due to higher mileage travelled during the Qingming Festival. That said, demand for diesel fuel declined during the month that partially offset overall gains. Vehicle sales in China continued to decline during April-19 by around 18 percent. The YTD-19 decline in auto sales stood at around 15 percent as compared to last year. India’s oil demand witnessed a modest growth during April-19 growing by around 0.3 percent y-o-y.
World oil supply
World oil supply increased marginally during May-19 by 0.04 mb/d to average at 98.26 mb/d. The increase was primarily on the back of non-OPEC supply that increased by 0.27 mb/d mainly in US, Kazakhstan, Azerbaijan, Canada and the UK. For the full year, non-OPEC oil supply estimates remained unchanged from last month with a growth of 2.14 mb/d to average at 64.51 mb/d although there were adjustments to estimates of individual countries.
Oil supply estimates from the US was lowered by 13 tb/d led by smaller than expected output during Q1-19, in addition to downward revisions to supply figures for Norway (-24 tb/d) and Brazil (-23 tb/d) that are expected to show slower supply during the last two quarters of the year due to planned maintenance activity. These downward revisions were offset by upward revisions in supply data for China and the UK. Supply estimates from China was raised by 62 tb/d reflecting higher production during Q1-19 led by an increase in spending by Chinese oil companies as compared to last year. Overall, supply from the OECD region saw a downward revision of 38 tb/d as compared to last month’s estimates. Oil supply from the OECD Europe region declined by 0.07 mb/d in April-19 primarily due to lower output from Norway by around 24 tb/d as compared to March-19 levels. For the full year, Norway’s output was lowered by 0.02 mb/d as compared to last month’s report highlighting field declines and technical outages. In the OECD Asia Pacific region, production in Australia is expected to be supported by new projects started last year. As a result, production in April-19 increased by 58 tb/d y-o-y.
OPEC oil production & spare capacity
According to oil production data from Bloomberg, OPEC crude production remained flat during May-19 at 30.26 mb/d. However, OPEC secondary sources showed a decline in OPEC production during the month by 236 tb/d to average at 29.88 mb/d. Iran reported the biggest drop in production during the month reaching 2.3 mb/d after declining by more than 200 tb/d during the month. The decline came after the US ended waivers granted to 8 countries to import oil from Iran. According to IEA, the US sanctions have pushed Iran’s oil production to the lowest level since the 1980s. Production in Saudi Arabia is also said to have a declined although Bloomberg data shows otherwise. OPEC’s secondary sources and direct communication in addition to data from S&P Platts show a decline in the Kingdom’s output that reached around 9.7 mb/d in May-19, the lowest in 4-years. The Kingdom continues to produce at a much lower level as compared to its quota of 10.31 mb/d as per the OPEC+ supply agreement.
Nigeria also reported a decline in production by almost 40 tb/d as compared to previous month led by pipeline disruptions that affected the country’s oil exports. Production was affected by a fire at the Trans Forcados crude pipeline, forcing a shutdown affecting the export of the Bonny Light crude until mid-May-19. Venezuela continued to face power cut issues that affected the country’s oil production. Production stood at around 800 tb/d during May-19 led by US sanctions on the country. Oil exports from the country declined by almost 17 percent during the month as customers lowered purchases following sanctions.
Meanwhile, production in Angola increased by around 70 tb/d during May-19 as the country began shipments of new crude grade Mostarda. In order to increase oil production, the country has drawn plans for sizable investments in the oil sector in collaboration with international oil companies and has recently announced new oil block auctions.
Production and oil exports from Iraq also reportedly scaled up in recent months. The country’s crude is replacing lost Iran oil to customers in Europe and to India and China since the start of the year. There are also plans to raise oil output from the West Qurna 1 oil field by around 50 tb/d in the coming days.
KAMCO Oil Market Monthly Report