Oil Market Report - January 2020

• Global oil supply tumbled 780 kb/d in December as biofuels production declined seasonally and Saudi Arabia reduced output. At 100.7 mb/d, the global total was down 1.3 mb/d on a year ago, with OPEC supply 2.4 mb/d lower. With non-OPEC oil supply growth accelerating from 2 mb/d in 2019 to 2.1 mb/d this year, the call on OPEC crude falls to 28.5 mb/d during 1H20 compared with December production of 29.44 mb/d. Steeper OPEC+ cuts take effect this month.
• Global oil demand rose by 955 kb/d y-o-y to 101.1 mb/d in October and for 4Q19 it is estimated to have grown by 1.9 mb/d versus a low 4Q18 level. We see continued strong momentum in non-OECD countries with China and India demand growing 0.8 mb/d and 0.5 mb/d respectively in November. US demand is flat in 2019. Our global demand growth forecasts for 2019 and 2020 remain unchanged, at 1 mb/d and 1.2 mb/d.
• For 4Q19 and 2019 as a whole global refinery runs are estimated to have declined by 0.2 mb/d y-o-y. Refining margins continued falling in December due to higher crude prices, and exceptions were largely due to widening sour crude differentials. Global refining intake in 2020 is forecast to increasy by 1.1 mb/d, supported by a recovery in refined product demand, estimated to grow by 0.8 mb/d.
• OECD industry stocks fell 2.9 mb in November to 2 912 mb. They were 8.9 mb above the five-year average and covered 60.6 days, 0.6 days below the average. Preliminary data for December showed inventories building in the US and Europe and falling in Japan. Short-term floating storage of crude oil built 4.5 mb in December to 66.5 mb. The number of Iranian VLCCs used for floating storage increased by two to 28.
• ICE Brent surged $4/bbl following US/Iran clashes in Iraq in early January but prices have retreated below $65/bbl as supplies were not interrupted. As the new IMO rules are introduced, cracks for compliant VLSFO made large gains and HSFO in Singapore drew some support on demand from ships fitted with scrubbers. Freight rates strengthened due to the IMO transition to more expensive shipping fuels and escalating tensions in the Middle East Gulf.

• Global oil supply tumbled 780 kb/d in December as biofuels production declined seasonally and Saudi Arabia reduced output. At 100.7 mb/d, the global total was down 1.3 mb/d on a year ago, with OPEC supply 2.4 mb/d lower. With non-OPEC oil supply growth accelerating from 2 mb/d in 2019 to 2.1 mb/d this year, the call on OPEC crude falls to 28.5 mb/d during 1H20 compared with December production of 29.44 mb/d. Steeper OPEC+ cuts take effect this month.
• Global oil demand rose by 955 kb/d y-o-y to 101.1 mb/d in October and for 4Q19 it is estimated to have grown by 1.9 mb/d versus a low 4Q18 level. We see continued strong momentum in non-OECD countries with China and India demand growing 0.8 mb/d and 0.5 mb/d respectively in November. US demand is flat in 2019. Our global demand growth forecasts for 2019 and 2020 remain unchanged, at 1 mb/d and 1.2 mb/d.
• For 4Q19 and 2019 as a whole global refinery runs are estimated to have declined by 0.2 mb/d y-o-y. Refining margins continued falling in December due to higher crude prices, and exceptions were largely due to widening sour crude differentials. Global refining intake in 2020 is forecast to increasy by 1.1 mb/d, supported by a recovery in refined product demand, estimated to grow by 0.8 mb/d.
• OECD industry stocks fell 2.9 mb in November to 2 912 mb. They were 8.9 mb above the five-year average and covered 60.6 days, 0.6 days below the average. Preliminary data for December showed inventories building in the US and Europe and falling in Japan. Short-term floating storage of crude oil built 4.5 mb in December to 66.5 mb. The number of Iranian VLCCs used for floating storage increased by two to 28.
• ICE Brent surged $4/bbl following US/Iran clashes in Iraq in early January but prices have retreated below $65/bbl as supplies were not interrupted. As the new IMO rules are introduced, cracks for compliant VLSFO made large gains and HSFO in Singapore drew some support on demand from ships fitted with scrubbers. Freight rates strengthened due to the IMO transition to more expensive shipping fuels and escalating tensions in the Middle East Gulf.

The recent tension in the Middle East has once again added a layer of uncertainty to the oil market outlook. We cannot know how the geopolitical situation will play out over time, but for now the risk of a major threat to oil supplies appears to have receded. As was the case following the attacks on Saudi Arabia in September, once the initial fears of a sustained supply shock subsided, the Brent price rapidly gave up its $4/bbl spike and as we publish this Report it is just above $64/bbl, little changed from immediately after the OPEC+ agreement was signed in December. Today’s market where non-OPEC production is rising strongly and OECD stocks are 9 mb above the five-year average, provides a solid base from which to react to any escalation in geopolitical tension. As a back-up resource, the value of strategic stocks has once again been confirmed.

Recent events have shown that Iraq is a potentially vulnerable supplier, just as its strategic importance has grown. In recent years production and export capacity have expanded fast: in 2010 Iraq exported 2 mb/d and now the figure is 4 mb/d. Iraq’s rising capacity has been very welcome as sanctions have reduced Iran’s exports to only 0.3 mb/d and Venezuela’s production has collapsed. Today, both China and India receive about 1 mb/d of oil from Iraq and another 1 mb/d moves to various European countries. In India’s case, around 20% of its crude imports come from Iraq. Amongst Iraq’s other customers is the US. Data from the Energy Information Administration show that in January-October 2019 the US imported 337 kb/d from Iraq, and just below 1 mb/d from the Middle East Gulf as a whole. In the medium term heightened security concerns might make it more difficult for Iraq to build production capacity. In turn, this could make it more difficult to ensure there is sufficent spare production capacity to meet rising global demand in the second half of this decade.

In this Report, our main headline data for 2020 is largely unchanged from last month. Oil demand growth is forecast to accelerate to 1.2 mb/d, supported partly by prices remaining relatively subdued, higher global GDP growth than last year and by progress in settling trade disputes. The OPEC+ countries need to cut output by about 0.3 mb/d in January to comply with their new agreement. Meanwhile, non-OPEC production is forecast to grow by 2.1 mb/d in 2020 with stronger growth in the first half of the year.

The International Maritime Organisation’s new marine fuel regulations came into effect on 1 January. Although there are initial local difficulties as might be expected from such a complex global change, ship operators, products suppliers and ports have so far coped well (see page 13. of this Report).

At the start of 2020 the oil market has again faced a period of geopolitical turmoil at the same time as a significant sector is adjusting to a major change to its operating environment. That we have such a well-supplied and increasingly globalised market will help us to face these challenges.

The recent tension in the Middle East has once again added a layer of uncertainty to the oil market outlook. We cannot know how the geopolitical situation will play out over time, but for now the risk of a major threat to oil supplies appears to have receded. As was the case following the attacks on Saudi Arabia in September, once the initial fears of a sustained supply shock subsided, the Brent price rapidly gave up its $4/bbl spike and as we publish this Report it is just above $64/bbl, little changed from immediately after the OPEC+ agreement was signed in December. Today’s market where non-OPEC production is rising strongly and OECD stocks are 9 mb above the five-year average, provides a solid base from which to react to any escalation in geopolitical tension. As a back-up resource, the value of strategic stocks has once again been confirmed.

Recent events have shown that Iraq is a potentially vulnerable supplier, just as its strategic importance has grown. In recent years production and export capacity have expanded fast: in 2010 Iraq exported 2 mb/d and now the figure is 4 mb/d. Iraq’s rising capacity has been very welcome as sanctions have reduced Iran’s exports to only 0.3 mb/d and Venezuela’s production has collapsed. Today, both China and India receive about 1 mb/d of oil from Iraq and another 1 mb/d moves to various European countries. In India’s case, around 20% of its crude imports come from Iraq. Amongst Iraq’s other customers is the US. Data from the Energy Information Administration show that in January-October 2019 the US imported 337 kb/d from Iraq, and just below 1 mb/d from the Middle East Gulf as a whole. In the medium term heightened security concerns might make it more difficult for Iraq to build production capacity. In turn, this could make it more difficult to ensure there is sufficent spare production capacity to meet rising global demand in the second half of this decade.

In this Report, our main headline data for 2020 is largely unchanged from last month. Oil demand growth is forecast to accelerate to 1.2 mb/d, supported partly by prices remaining relatively subdued, higher global GDP growth than last year and by progress in settling trade disputes. The OPEC+ countries need to cut output by about 0.3 mb/d in January to comply with their new agreement. Meanwhile, non-OPEC production is forecast to grow by 2.1 mb/d in 2020 with stronger growth in the first half of the year.

The International Maritime Organisation’s new marine fuel regulations came into effect on 1 January. Although there are initial local difficulties as might be expected from such a complex global change, ship operators, products suppliers and ports have so far coped well (see page 13. of this Report).

At the start of 2020 the oil market has again faced a period of geopolitical turmoil at the same time as a significant sector is adjusting to a major change to its operating environment. That we have such a well-supplied and increasingly globalised market will help us to face these challenges.