In its latest OPEC Monthly Oil Market Report (October) the oil cartel has increased its oil demand estimates for 2017, 2018 on strengthening world economy, and weaker outlook for supplies from its rivals.
Specifically, OPEC forecasts that based on the current global oil supply/demand balance, demand for OPEC crude in 2017 is estimated at 32.8 mb/d, around 0.6 mb/d higher than in 2016. Similarly, OPEC crude in 2018 is projected at 33.1 mb/d, 350k b/d higher than September production, and ~200k b/d higher than the group estimated last month. Global oil demand seen rising +1.38m b/d, or 1.4% in 2018 to 98.19m b/d
Meanwhile, OPEC claims that oil inventories in developed nations continued to decline, -24.7m bbl to 2.996b bbl in August, curbing surplus relative to a 5-year average to 171m bbl.
Here are the key highlights from the report:
Crude Oil Price Movements
The OPEC Reference Basket rose to $53.44/b in September, its highest value since July 2015. Crude futures prices also saw gains, with ICE Brent averaging above the $55/b, supported by increasing evidence that the oil market is heading toward rebalancing. Geopolitical tensions and lower distillates stocks also pushed prices higher. ICE Brent averaged $55.51/b in September, a gain of $3.64, while NYMEX WTI increased $1.82 to average $49.88/b. Hedge funds raised net long position in ICE Brent and NYMEX WTI futures and options by almost 200,000 contracts. At the end of the month, the Brent crude contract curve had flipped into backwardation through December 2021. The sweet/sour spread widened significantly in Asia and Europe.
World Economy
Growth in the world economy continues to improve, with the forecast for 2017 revised up to 3.6% from 3.5% in last month’s report. Similarly, the 2018 forecast has been adjusted higher to 3.5% from 3.4%. The improving momentum is visible in all economies, particularly the OECD, which is seen growing by 2.2% in 2017 and by an upwardly revised 2.1% in 2018. US growth in 2018 has been revised up to 2.3% and the EU to 1.9% for the same year. Russia has also seen an upward revision for 2018 to now stand at 1.6%, compared to 1.4% in the previous report. Growth expectations for India and China were left unchanged for both 2017 and 2018.
World Oil Demand
World oil demand growth in 2017 is now expected to increase by 1.5 mb/d, representing an upward revision of around 30 tb/d from last previous report, mainly reflecting recent data showing an improvement in economic activities. Positive revisions were primarily a result of higher-than-expected oil demand from the OECD region and China. In 2018, world oil demand is anticipated to grow by 1.4 mb/d, following an upward adjustment of 30 tb/d over the previous report, due to the improving economic outlook in the world economy, particularly China and Russia.
World Oil Supply
Non-OPEC oil supply is expected to grow by 0.7 mb/d in 2017, following a downward revision of 0.1 m/bd from the previous report. In 2018, the growth in non-OPEC oil supply saw a downward revision of 60 tb/d to stand at 0.9 mb/d. OPEC NGLs and non-conventional liquids production are seen averaging 6.5 mb/d in 2018, representing an increase of 0.2 mb/d, broadly in line with growth in the current year. In September, OPEC crude oil production increased by 88 tb/d, according to secondary sources, to average 32.75 mb/d.
Separately, according to secondary source data, OPEC output in September rose +88.5k b/d to 32.748m b/d; the increase was mostly driven by higher output from Libya +54k b/d, Nigeria +51k, who are exempt from cuts, as well as gains in Iraq production. Saudi Arabian output was unchanged at 9.975m b/d, lowest since May, although based on self-reported data, Saudi production rose by 21.7k b/d to 9.973m b/d.
Additionally, OPEC raised its 2018 oil-demand projections by ~100k b/d to 98.2m b/d, while estimates for non- OPEC supply were cut by 100k b/d this year, -200k b/d in 2018; weaker outlook for next year on lower forecasts for Russia. In summary, OPEC sees that oil market remaining supported in coming months on expectations that supplies of middle distillates like heating oil "will remain relatively tight this winter."
Perhaps the most interesting tidbit in the report, however, was OPEC's admission (on page 45) that there is little upside to prices from here as a result of oil producers ramping up above $50, to wit:
Non-OPEC production is expected to increase next year, primarily as a result of projects that were approved before the 2014 price collapse. When the WTI price remained below $50/b for a longer period, US production growth slowed as the oil rig count declined. Lower prices are beginning to weigh on US shale oil activity as concerns mount that aggressive development could lead to output declines. Oil prices are expected to remain at $50-55/b in the next year. A rise above that level would encourage US oil producers to expand their drilling activities, otherwise the lower prices could lead to a reduction in their Capex.