Oil Market Report - February 2019

• Our global demand estimate for 2018 is unchanged. Growth in 4Q18 was robust at 1.4 mb/d y-o-y and for 2018 as a whole growth was 1.3 mb/d. China (0.44 mb/d), India (0.21 mb/d) and the US (0.54 mb/d) contributed 1.19 mb/d of the total.
• Growth in demand in 2019 is expected to be 1.4 mb/d, unchanged from our last Report. It is supported by lower prices and the start-up of petrochemical projects in China and the US. Slowing economic growth will, however, limit any upside.
• Global supply fell 1.4 mb/d to 99.7 mb/d in January as the Vienna Agreement and Alberta's cuts took effect. Our non-OPEC growth estimates have increased to 2.7 mb/d in 2018 and to 1.8 mb/d in 2019. This is mainly due to higher US output.
• OPEC crude output was 930 kb/d lower in January at 30.83 mb/d, a near four-year low. Compliance with the Vienna Agreement was 86%, with Saudi Arabia, UAE and Kuwait cutting by more than promised. Compliance by non-OPEC participants was only 25%.
• In December, global refining throughput fell 0.7 mb/d y-o-y instead of an expected increase due to lower activity in Asia's four largest refiners: China, India, Japan and Korea. Our 2019 forecast is unchanged, with runs expected to grow by 1.2 mb/d.
• At end-December, OECD oil company stocks were 5.6 mb below the November level at 2 858 mb, up 4.6 mb compared with end-2017. The major stock build in 2H18 was in non-OECD countries. Government stocks drew in 2018 by 22.1 mb, mainly in the US and Europe.
• Brent futures reached a two-month high of $62.75/bbl in early February, with WTI prices around $10/bbl below. The Brent-Dubai EFS narrowed to an eight-year low as sour crude markets tightened. Ample supplies of gasoline saw cracks decline into negative territory.

• Our global demand estimate for 2018 is unchanged. Growth in 4Q18 was robust at 1.4 mb/d y-o-y and for 2018 as a whole growth was 1.3 mb/d. China (0.44 mb/d), India (0.21 mb/d) and the US (0.54 mb/d) contributed 1.19 mb/d of the total.
• Growth in demand in 2019 is expected to be 1.4 mb/d, unchanged from our last Report. It is supported by lower prices and the start-up of petrochemical projects in China and the US. Slowing economic growth will, however, limit any upside.
• Global supply fell 1.4 mb/d to 99.7 mb/d in January as the Vienna Agreement and Alberta's cuts took effect. Our non-OPEC growth estimates have increased to 2.7 mb/d in 2018 and to 1.8 mb/d in 2019. This is mainly due to higher US output.
• OPEC crude output was 930 kb/d lower in January at 30.83 mb/d, a near four-year low. Compliance with the Vienna Agreement was 86%, with Saudi Arabia, UAE and Kuwait cutting by more than promised. Compliance by non-OPEC participants was only 25%.
• In December, global refining throughput fell 0.7 mb/d y-o-y instead of an expected increase due to lower activity in Asia's four largest refiners: China, India, Japan and Korea. Our 2019 forecast is unchanged, with runs expected to grow by 1.2 mb/d.
• At end-December, OECD oil company stocks were 5.6 mb below the November level at 2 858 mb, up 4.6 mb compared with end-2017. The major stock build in 2H18 was in non-OECD countries. Government stocks drew in 2018 by 22.1 mb, mainly in the US and Europe.
• Brent futures reached a two-month high of $62.75/bbl in early February, with WTI prices around $10/bbl below. The Brent-Dubai EFS narrowed to an eight-year low as sour crude markets tightened. Ample supplies of gasoline saw cracks decline into negative territory.

The imposition of sanctions by the United States against Venezuela's state oil company Petroleos de Venezuela (PDVSA) is another reminder of the huge importance for oil of political events. In 2018, about 450 kb/d was shipped to the US, although this is only a fraction of the 1.7 mb/d exported in 1998 when President Chavez was on the verge of power. Much of the oil is used in PDVSA's US refining system, run by its subsidiary Citgo. The collapse in exports mirrors the collapse of production over the same period from 3.4 mb/d to about 1.3 mb/d today. In addition, Venezuela took a political decision to ship oil to China; initially to diversify export markets as Canada's shipments to the US soared, but more recently as repayment for tens of billions of dollars of loans. Shipments to India too, have grown, reaching 360 kb/d in 2017, but last year they fell by 11%.

What we do know is that the sanctions are already making it difficult for PDVSA to export oil. Even so, headline benchmark crude oil prices have hardly changed on news of the sanctions. This is because, in terms of crude oil quantity, markets may be able to adjust after initial logistical dislocations. Stocks in most markets are currently ample and, with the implementation of the new Vienna Agreement at the start of the year, there is more spare production capacity available.

Crude oil quality is another issue, and, in the wider context of supply in the early part of 2019, it is even more important. Sanctions against Iran, a fall in OPEC supply of 930 kb/d in January, sanctions against PDVSA and Alberta supply cuts all impact directly on the supply of heavy, sour oil. In the case of PDVSA, its oil is typically of the heaviest quality and requires the addition of significant quantities of imported diluents or domestic blending. With the import of diluents now sanctioned by the US, and problems in producing its own lighter crudes, PDVSA will have a tough job to make enough on spec barrels available for export. This is before it gets to the issue of who will buy them.

Long before the US shale revolution took off, Gulf Coast refiners had invested in equipment to process barrels expected to get heavier and sourer. Instead, Venezuelan supplies dwindled, as did Mexico's, and Saudi exports to the US fell sharply as they turned their attention to fast growing Asian markets. Meanwhile, Canadian exports, mainly of heavier, sourer crude, poured into the Gulf to partly fill the gap. In addition, despite the preference of refiners for heavier crudes, huge volumes of cheap shale oil became available because exports were not allowed and stocks built up to record levels. In time, the US export ban was lifted and producers could sell oil abroad at significantly higher prices. Therefore, Gulf Coast importers would continue to need the kind of crude produced by Venezuela and some Middle Eastern countries.

With heavy barrels being removed from the market, refiners have to pay more. The premium of Light Louisiana Sweet crude over Mars crude has fallen to below $1/bbl from more than $4/bbl in November. Since the US sanctions against Venezuela were announced, the premium of Mars over WTI has soared from $4.50/bbl to over $7.50/bbl.

So far, there are no signs that other producers, e.g. Saudi Arabia, are intending to push more barrels into the market to offset shortfalls. Oil prices have not increased alarmingly because the market is still working off the surpluses built up in the second half of 2018, when global supply is estimated to have exceeded demand by 1.3 mb/d. In quantity terms, in 2019 the US alone will grow its crude oil production by more than Venezuela's current output. In quality terms, it is more complicated. Quality matters.

The imposition of sanctions by the United States against Venezuela's state oil company Petroleos de Venezuela (PDVSA) is another reminder of the huge importance for oil of political events. In 2018, about 450 kb/d was shipped to the US, although this is only a fraction of the 1.7 mb/d exported in 1998 when President Chavez was on the verge of power. Much of the oil is used in PDVSA's US refining system, run by its subsidiary Citgo. The collapse in exports mirrors the collapse of production over the same period from 3.4 mb/d to about 1.3 mb/d today. In addition, Venezuela took a political decision to ship oil to China; initially to diversify export markets as Canada's shipments to the US soared, but more recently as repayment for tens of billions of dollars of loans. Shipments to India too, have grown, reaching 360 kb/d in 2017, but last year they fell by 11%.

What we do know is that the sanctions are already making it difficult for PDVSA to export oil. Even so, headline benchmark crude oil prices have hardly changed on news of the sanctions. This is because, in terms of crude oil quantity, markets may be able to adjust after initial logistical dislocations. Stocks in most markets are currently ample and, with the implementation of the new Vienna Agreement at the start of the year, there is more spare production capacity available.

Crude oil quality is another issue, and, in the wider context of supply in the early part of 2019, it is even more important. Sanctions against Iran, a fall in OPEC supply of 930 kb/d in January, sanctions against PDVSA and Alberta supply cuts all impact directly on the supply of heavy, sour oil. In the case of PDVSA, its oil is typically of the heaviest quality and requires the addition of significant quantities of imported diluents or domestic blending. With the import of diluents now sanctioned by the US, and problems in producing its own lighter crudes, PDVSA will have a tough job to make enough on spec barrels available for export. This is before it gets to the issue of who will buy them.

Long before the US shale revolution took off, Gulf Coast refiners had invested in equipment to process barrels expected to get heavier and sourer. Instead, Venezuelan supplies dwindled, as did Mexico's, and Saudi exports to the US fell sharply as they turned their attention to fast growing Asian markets. Meanwhile, Canadian exports, mainly of heavier, sourer crude, poured into the Gulf to partly fill the gap. In addition, despite the preference of refiners for heavier crudes, huge volumes of cheap shale oil became available because exports were not allowed and stocks built up to record levels. In time, the US export ban was lifted and producers could sell oil abroad at significantly higher prices. Therefore, Gulf Coast importers would continue to need the kind of crude produced by Venezuela and some Middle Eastern countries.

With heavy barrels being removed from the market, refiners have to pay more. The premium of Light Louisiana Sweet crude over Mars crude has fallen to below $1/bbl from more than $4/bbl in November. Since the US sanctions against Venezuela were announced, the premium of Mars over WTI has soared from $4.50/bbl to over $7.50/bbl.

So far, there are no signs that other producers, e.g. Saudi Arabia, are intending to push more barrels into the market to offset shortfalls. Oil prices have not increased alarmingly because the market is still working off the surpluses built up in the second half of 2018, when global supply is estimated to have exceeded demand by 1.3 mb/d. In quantity terms, in 2019 the US alone will grow its crude oil production by more than Venezuela's current output. In quality terms, it is more complicated. Quality matters.