The IEA’s Oil Market Report forecast data was made publicly available yesterday [LINK] and didn’t have any impact on oil prices despite positive forecast data showing that global oil stocks could correct by 293.8 million barrels to year end 2017 with continued OPEC/Non-OPEC cuts, and Libya and Nigeria production at the last few months levels. Its probably because the EIA and OPEC recent May forecast data show much lower global oil stocks corrections – the EIA at 145.1 million barrels and OPEC at 45.5 million barrels. Given that global oil stocks were ~300 million barrels above the 5 year average at March 31, 2017, its easy to see why there isn’t any conviction to oil prices right now.
The other factor driving WTI oil below $50 is that there hasn’t been any significant impact to date from the OPEC/Non-OPEC cuts on global oil inventories. Global oil demand is always seasonally low in Q1 and early Q2 so the impact of the OPEC/non-OPEC cuts wasn’t likely to be felt until now. But an added 1.9 to 2.0 million b/d of oil demand in H2/17 vs H1/17 should let the OPEC/Non-0PEC cuts start to have a consistent impact on oil stocks oversupply. This is the seasonally higher global oil demand period that is seen ever year where global oil demand is always significantly higher in H2 than in H1.
Oil stocks may not be correct as much as expected a few months ago, but should still correct enough to see oil to $55 instead of $60 in the fall. Why? Its because other oil supply factors (US and Libya) have emerged to increase the likelihood that OPEC cuts don’t lead to big enough reductions in global oil stocks to reach 5 year average levels by year-end 2017. This means that the $60 scenario is less likely to emerge unless the IEA is right in their forecast data.
OPEC’s target for its cuts is to get global oil inventories back to the 5 year average. There isn’t any one official number, but most tend to accept the IEA estimate that, at March 31, 2017, global oil stocks were estimated to be approximately 300 million barrels above the 5 year average.
IEA: OECD Total Oil End-of-Month Industry Stocks
Source: IEA Oil Market Report May 2017
Higher global oil demand in H2/17 should add incremental oil demand of ~350 to 370 million barrels. Every year, global oil demand is always up strongly in H2 compared to H1. This was the focus for our March 29, 2017 blog “Every Year Oil Demand Is Up Big In H2 Vs H1, Expecting +50 Million Barrels Per Month In H2/17”. There are a range of global reasons, but the biggest one is that US refineries typically use >1 million b/d of crude oil inputs vs Q1. Crude oil inputs to refineries in May has been up ~1.5 million b/d compared to the trough US refinery demand in Feb. The below table shows the May forecasts for IEA, EIA and OPEC and how they forecast H2/17 oil demand to be 1.9 to 2.0 million b/d higher than H1/17.
But even still, there is increasing concern that the cuts won’t accomplish the key objective – reduce global oil stocks to the 5 year average by year end. And the primary reason is US oil production continues to be significantly better than expected. This was the focus for our May 9, 2017 blog “Will Finer Proppant Be The Next Completion Tweak That Leads To US Shale Oil Surprising To the Upside In 2018?” US shale oil continues to surprise to the upside and forecasts for US oil production growth seem to get increased every month. Since its Jan 2017 STEO forecast, the EIA has increased its US 2017 production forecast by 0.31 million b/d, and its US 2018 production forecast by 0.66 million b/d. The impact of the increases is to add 113.2 million barrels to 2017 supply and to add 240.9 million barrels to 2018 supply. This is the primary reason why there is increasing doubt on fixing the oil stock surplus by year-end 2017. Both the IEA and OPEC also increased their US oil production growth forecasts in their May forecasts.
The outlook for US oil growth continuing to get better and better is causing an increasing challenge to get global oil inventories back to 5 year average levels. As noted above, the EIA increased its 2017 oil supply by 113.2 million barrels from its increased US oil production forecasts since Jan. 2017. And it is why there is a variability in the round of May monthly forecasts for US liquids growth in 2017. For 2017 vs 2016, the IEA forecasts US liquids up 0.510 million b/d in 2017, the EIA up 0.773 million b/d and OPEC by up 0.820 million b/d. The variance is significant. Over the final 9 months of 2017 (Apr 1 to Dec 31), the EIA forecasts added US liquids supply of 72.3 million barrels vs the IEA, and OPEC an added 85.3 million barrels vs the IEA.
It also makes it clearer why oil is below $50 by looking at the numbers. Based on the latest round of May monthly forecasts, we estimate how much global oil inventories will be reduced in last 9 months of 2017 assuming (i) call on OPEC oil as per the IEA, EIA, or OPEC, (ii) Libya and Nigeria at Feb/Mar/Apr levels (more on this later), and (iii) the remaining OPEC at the target cut levels of ~30.0 million b/d. We left the variances in the monthly forecasts such as US oil production. The IEA May forecast shows the potential for a reduction in global oil stocks to be down by 293.8 million barrels, vs the EIA at down 145.1 million barrels, and vs OPEC at down 45.5 million barrels. We also noted how the EIA and OPEC estimates would change using the IEA’s less optimistic US oil growth rate in 2017 vs 2016. The numbers showing that OPEC will likely need to do more in 2018 and likely well beyond March 31, 2018 is why markets are looking at OPEC to know what happens after March 31, 2018.
Plus there are still wildcards to supply that are causing markets more concern – Libya and Nigeria. Both countries continue to be excluded from any OPEC oil cuts. Over the past few months, Libya has averaged ~0.6 million b/d and Nigeria ~1.4 million b/d, and those are the production levels we used in the above table. Libya is the bigger concern considering it is expecting oil to hit 0.8 million b/d in June and higher by the fall. Adding 0.2 million b/d for Q3 and Q4 will add 36.8 million barrels of oil supply. Plus Nigeria still believes it can get back above 2 million b/d in H2/17.
An extra 1.9 to 2.0 million b/d of demand has to be positive to oil prices. This is 57 to 60 million barrels per month of added demand. So we should start to see the impact of OPEC/non-OPEC cuts have a consistent impact, even with the higher US oil production. And if global oil stock levels start tracking down with the increasing oil demand this summer, we should see oil prices move back above $50.
The 3 different scenarios on oil stock corrections probably provide a good guide to where oil should reach in the fall. If the IEA is right and oil stocks can correct by 293.8 million barrels in H2/17, then we can still see WTI hitting $60 in Q4/17. We see WTI more like a $55 scenario if the EIA is right and $50 scenario if OPEC is right. If the US keeps tracking to the EIA’s oil growth forecast for 2018 (hitting 10.22 million b/d in Q4/18), it will likely be THE issue of discussion at, and in the run up to, OPEC’s Nov 30 meeting. Its good that the key western Canadian oil plays make strong half cycle returns at WTI $50. The plays aren’t big in size and scope like the Permian to broadly attract risk capital, but the half cycle play returns are likely as strong, if not higher for some of our key existing and new oil plays.