Oil prices reach 5-month-high led by OPEC supply curbs

KUWAIT: The supply cut-led oil price rally that started at the start of the year got further support this month as OPEC produced at pre-oil crisis levels. Spot crude prices reached the critical $70/b mark by the end of last week but the rally was somewhat halted by the weekly US oil inventory report. The latest EIA report showed US oil inventories increasing by more than 7 mb/d, exceeding analyst expectations, and reached a 17-month high level of 456.55 million barrels. The increase in inventory came after the US produced at a record pace of 12.2 mb/d making it the biggest oil producer ahead of Russia and Saudi Arabia. However, a steep decline in gasoline stocks provided support to oil prices as the excess crude inventory could be sucked up by refineries ahead of the peak summer driving season in the US.

The shrinking supply-demand gap recently has led to consistent gains in oil prices. However, the market tightening is primarily led by supply-side factors. During March-19, production by OPEC members reached multi-year lows and was reported at 30.4 mb/d as almost all the producers slashed production based on their respective quotas, in addition to the plunge in production in Venezuela. As a result, OPEC compliance to the agreed limits of the OPEC+ agreement reached 155 percent in March-19 as compared to 104 percent in February-19. Non-OPEC countries including Russia and Kazakhstan also contributed to the supply cuts although these producers face pressure from local companies on raising output post June-19. There are also talks reportedly hinting at a modified version of the supply cut agreement if production in Iran and Venezuela continue to decline in the coming months and price of crude remains elevated.

Meanwhile, the pace of growth in crude oil production in the US is expected to be lower than previously expected. According to Rystad Energy, E&P spending in the US is expected to decline by 6 percent this year. This is especially the case with smaller E&P companies as compared to well-funded larger players. However, the impact of lower spending on output would only be reflected in the next year’s production. This was reflected in IEA’s latest forecast for oil production growth in the US.

The agency raised production forecast for the current year but lowered it slightly for the 2020. Another report said that oil discoveries in the US is declining at a faster pace. According to the Texas Railroad Commission, oil drillers in the US state of Texas made zero discoveries during March-19 following one each in the previous two years. Nevertheless, increasing efficiency in extracting crude with larger players as seen from the recently announced acquisition of Anadarko by Chevron is expected to cap the decline led by lower capital spending. In terms of oil demand, lack of confidence continues to prevail owing to softer economic growth numbers for advanced economies, including US and the Euro Area. The OPEC marginally lowered its oil demand forecast for 2019. On the other hand, the IEA although kept its oil demand outlook unchanged, it said that demand data remains mixed due to weak economic growth.

Oil prices

Oil prices surged passed the $70/b mark during the second week of April-19 after an overall positive performance during March-19. Spot Brent prices were up more than 40 percent by 9-April-19 compared to its recent low in December-18 after crude spot prices recorded three consecutive weeks of gain by last week.

Average crude prices for almost all the crude grades were positive in March-19 as compared to February-19. Average OPEC crude prices gained 4.0 percent m-o-m during March-19 to reach $66.4/b, marking the third consecutive month of growth. Kuwait crude average price gains were slightly higher at 4.5 percent and averaged at $66.8/b, while average Brent crude gained 3.3 percent to reach $66.1/b. Nevertheless, a steep increase in US crude inventory temporarily disrupted the oil rally. According to the latest EIA weekly report, crude inventories in the US increased for the third consecutive week by 7 million barrels during the week ended 5-April-19 after increasing by an aggregate 10 million barrels during the previous two weeks.

In its latest forecast, the EIA raised its US crude oil production to 1.43 mb/d in 2019 to average at 12.39 mb/d as compared to its previous growth forecast of 1.35 mb/d. Due to the higher base, production in 2020 is forecasted to increase at a slightly slower pace of 0.71 mb/d to reach 13.1 mb/d as compared to last months 13.03 mb/d. The EIA kept demand growth outlook unchanged for 2019 at 0.36 mb/d and raised 2020 demand growth to 0.25 mb/d. The declining trend in oil rigs in the US reversed this week. According to the latest report from Baker Hughes, weekly oil rig count in the US increased by 15 to reach 831 active oil rigs during the week ended 5-April-19 after declining for six consecutive weeks.

World oil demand

World oil demand estimates for 2018 was once again lowered in OPEC’s latest monthly forecast by 0.02 mb/d and demand is estimated to have grown by 1.41 mb/d to reach 98.7 mb/d. The lowered estimates reflected a revision of 0.06 mb/d to demand estimates for the OECD Asia Pacific region led by lower-than-expected oil demand in Japan and South Korea. Demand growth expectation for 2019 was also lowered by 30 tb/d to a growth of 1.21 mb/d resulting in a total demand of 99.91 mb/d.
The revision reflected a decline in expectations of economic growth for the OECD region during the year. The latest monthly demand data for the US showed the first y-o-y decline during January-19, albeit marginally, owing to higher base line effect. Preliminary data for February-19 and March-19 indicated strong growth in demand primarily led by higher demand for with road diesel, gasoline and

petroleum gas plant liquids. Elsewhere, Canada and OECD Europe reported growth in oil demand during January-19. Higher demand for the OECD Europe region was led by colder weather and a low baseline effect for almost all the petroleum categories although demand for gasoline and fuel oil dropped for the first time since the end of 2017 partially offsetting the overall growth. Preliminary data for February-19 indicated declining requirements for diesel fuel in the European Big 4 countries due to warmer weather conditions. The decline in passenger car registrations during the first two months of the year also highlighted an impact on oil demand.
In the OECD Asia Pacific region, February-19 demand in Japan recorded a sharp decline of 6.5 percent while South Korea and Australia recorded growth in demand during January-19. In the non-OECD space, China reported a y-o-y oil demand growth of 0.22 mb/d during February-19 led by higher demand for LPG and gasoline partially offset by a decline in demand for diesel led by slower mining and construction activities. The country recorded a 13 percent decline in passenger car sales during the first two months of the year. Oil demand in India also continued to grow during February-19 largely due to an increase in government’s infrastructure spending. Gasoline sales in India recorded a growth of almost 8 percent y-o-y despite softer vehicle sales figures.

World oil supply

According to preliminary data, global oil supply declined for the fourth consecutive month during March-19. Supply continued to remain below the 100 mb/d mark and was estimated at 99.26 mb/d in February-19, a m-o-m decline of 0.14 mb/d. During the month, non-OPEC supply increased by 0.39 mb/d led by higher supply mainly from the US and Brazil. However, this increase was more than offset by a steep decline in OPEC production. Non-OPEC supply growth estimates for 2018 was once again revised upward by 0.16 mb/d and is now expected to have grown by 2.9 mb/d during the year to average at 62.37 mb/d. The revision mainly reflected higher output from UK, Brazil and China to the tune of 137 tb/d. Supply from OECD countries was revised upward by 94 tb/d with the biggest revision coming from OECD Europe at 71 tb/d primarily on the back of upward revision of production data for UK by 73 tb/d. Non-OPEC supply growth forecasts for 2019 was revised downwards by 0.06 mb/d to 2.18 mb/d and supply is now expected to average at 64.54 mb/d.

OPEC oil production & spare capacity

OPEC oil production reached multi-year lows during March-19 as producers continued to slash production during the month. Average monthly production was slightly above the 30 mb/d mark during the month as Saudi Arabia lowered production by 0.3 mb/d. The economic sanctions on Iran and Venezuela also dented overall OPEC production. As a result, production from the group was down more than 5 percent or close to 2.2 mb/d since its recent peak in November-18 with Saudi Arabia reducing its output by 11.3 percent or 1.3 mb/d as the Kingdom produced close to 0.5 mb/d below its agreed-upon target. The decline in Saudi Arabia’s oil production also indicates that it may not further lower its oil production from the current levels which is currently at a 4-year low level. Venezuela’s crude oil production reached a 16-year low level of 732 tb/d recording a m-o-m decline of almost 30 percent due to the month-long blackouts that crippled oil production facilities and ports in the country. The shortfall in Venezuelan oil supply to its European customers is said to have been replaced with Russian oil which offers similar grade of crude oil.

KAMCO Oil Market Monthly Report