by on SEPTEMBER 25, 2018
Do you remember the oil glut? Sure you do. It was not that long ago. The mother of all oil gluts. The oil glut that was supposedly so insurmountable that it was poised to keep oil prices lower for longer. In fact, some predicted that oil might not even trade above $30 a barrel ever again. Yet, now the glut is gone. Global oil prices are surging because we are now facing a market that is undersupplied as demand surges and there are no viable short-term solutions that can solve the issue.
This fact is starting to dawn on the marketplace, especially after OPEC and its Non-OPEC co-conspirators failed to increase production, despite pressure from President Donald Trump, raising doubts that they have enough spare production capacity to bring on enough production to offset lost barrels from Iran, Venezuela and questionable stability in Libyan output. While they assure us that they can, the market is skeptical. OPEC production fell last month.
The globe is also facing an increasing oil production decline rate that is only going to get worse after years of cutbacks in capital spending. Shale Oil production is also struggling to grow and despite its bright future is not able to offset the reduction in conventional oil plays. While many are shocked that we are at this point, they really should not be. It is the same story that we have seen in every boom and bust cycle since the beginning of time.
Brent Crude is leading the pack. OPEC’s non-action will tighten supply in Europe as we go forward. Diesel supplies globally are tight and despite that we have a lot of shale, oil there are shortages of medium crude that will only get tighter after Iranian sanctions reduce the export of medium-density oil from Iran. New regulations on cleaner burning ship fuels will only cause further tightness in the market.
While U.S. shale can’t solve all problems, the Energy Information Administration is reporting that crude oil surpassed hydrocarbon gas liquids (HGL) to become the largest U.S. petroleum export, with 1.8 million barrels per day (b/d) of exports in the first half of 2018. U.S. crude oil exports increased by 787,000 b/d, or almost 80%, from the first half of 2017 to the first half of 2018 and set a new monthly record of 2.2 million b/d in June. Much of this crude oil went to destinations in Asia and Oceania such as China, South Korea, and India. Europe was the second-largest market for U.S. crude oil exports, led by Italy, the United Kingdom, and the Netherlands. Canada was the only major U.S. crude oil export destination where exports decreased, down slightly in the first half of 2018 compared with the same period in 2017.
OPEC is also releasing their market outlook and it is not slowing down oil’s momentum at all. OPEC outlook for the World Economy says that “ The global GDP growth forecast remains at 3.8% for 2018 and 3.6% for 2019. In the OECD, growth in the U.S. is assessed unchanged at 2.9% in 2018 and 2.5% in 2019. Euro-zone growth remains at 2.0% for 2018 and 1.9% for 2019. GDP growth in Japan is revised down by 0.1 pp to 1.1% in both 2018 and 2019. Meanwhile, in the non-OECD, India’s forecast is revised up to 7.6% for 2018, while remaining unchanged at 7.4% for 2019. China’s GDP growth remains at 6.6% for 2018 and 6.2% for 2019. Growth in Brazil is revised down by 0.4% to reach 1.2% in 2018, but a rebound to 2.0% is anticipated in 2019. Russia’s GDP growth forecast is also revised lower to 1.6% in 2018 and down to 1.7% in 2019. World oil demand In 2018, is expected to grow by 1.62 mb/d, a minor downward revision from last month’s projection. In the OECD region, oil demand saw healthy growth in all three main OECD regions, particularly in the Americas over 1H18. In contrast, the non-OECD region, mainly Latin America and the Middle East, saw weaker oil requirements in 1H18 as well as slower economic projections, which has led to a net downward revision of 20 tb/d from last month’s report. Total oil demand for 2018 is now estimated at 98.82 mb/d. In 2019, world oil demand growth is forecast to rise by 1.41 mb/d, a minor downward adjustment of 20 tb/d from the previous month’s assessment, mainly reflecting the less optimistic economic projections in the non-OECD regions of Latin America and the Middle East compared to last month. Total world oil demand in 2019 is now projected to surpass 100 mb/d for the first time and reach 100.23 mb/d. World Oil Supply Non-OPEC oil supply in 2018 is expected to grow by 2.02 mb/d, a downward revision of 64 tb/d. The US, Canada, Kazakhstan the UK, and Brazil remain to be the main drivers for growth, while Mexico and Norway are projected to show the largest declines. Total non-OPEC supply for 2018 is now estimated at 59.56 mb/d. Non-OPEC oil supply in 2019 is forecast to grow by 2.15 mb/d, a minor upward revision of 17 tb/d. The U.S., Brazil, Canada, and the UK are expected to be the main growth drivers, while Mexico and Norway remain to be the largest declines. Non-OPEC supply is now forecast to average 61.71 mb/d for the year. OPEC NGLs in 2018 and 2019 are expected to grow by 0.12 mb/d and 0.11 mb/d to average 6.36 mb/d and 6.47 mb/d, respectively. In August, OPEC crude oil production increased by 278 tb/d to average 32.56 mb/d.
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