Global oil supply tumbled 780,000 barrels per day in December as biofuels production declined seasonally and Saudi Arabia reduced output, the International Energy Agency (IEA) said in the agency’s Oil Market Report (OMR) on 16 January.
At 100.7 million barrels per day, the global total was down 1.3 million barrels per day on a year ago, with the Organization of Petroleum Exporting Countries (OPEC) supply 2.4 million barrels per day lower. With non-OPEC oil supply growth accelerating from 2 million barrels per day in 2019 to 2.1 million barrels per day this year, the call on OPEC crude falls to 28.5 million barrels per day during the first half of 2020 compared with December production of 29.44 million barrels per day. Steeper OPEC+ cuts take effect this month, the IEA said.
“Global oil demand rose by 955,000 barrels per day year-on-year to 101.1 million barrels per day in October and for the fourth quarter of 2019 it is estimated to have grown by 1.9 million barrels per day versus a low fourth quarter of 2018 level. “We see continued strong momentum in non-Organisation for Economic Co-operation and Development (OECD) countries with China and India demand growing 0.8 million barrels per day and 0.5 million barrels per day respectively in November. US demand is flat in 2019. Our global demand growth forecasts for 2019 and 2020 remain unchanged, at 1 million barrels per day and 1.2 million barrels per day,” the IEA said.
For the fourth quarter of 2019 and 2019 as a whole global refinery runs are estimated to have declined by 0.2 million barrels per day year-on-year. 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 million barrels per day, supported by a recovery in refined product demand, estimated to grow by 0.8 million barrels per day,” the IEA said
OECD industry stocks fell 2.9 million barrels per day in November to 2 912 million barrels per day. They were 8.9 million barrels per day 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 million barrels in December to 66.5 million barrels per day. The number of Iranian VLCCs used for floating storage increased by two to 28.
ICE Brent surged $4 per barrelfollowing US/Iran clashes in Iraq in early January but prices have retreated below $65 per barrel 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 IEA said.
Tensions in the Middle East
According to the IEA, 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 per barrel spike and as we publish this Report it is just above $64 per barrel, little changed from immediately after the OPEC+ agreement was signed in December,” the IEA report read. “Today’s market where non-OPEC production is rising strongly and OECD stocks are 9 million barrels 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.”
The IEA said that 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 million barrels per day and now the figure is 4 million barrels per day. Iraq’s rising capacity has been very welcome as sanctions have reduced Iran’s exports to only 0.3 million barrels per day and Venezuela’s production has collapsed. Today, both China and India receive about 1 million barrels per day of oil from Iraq and another 1 million barrels per day 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 337,000 barrels per day from Iraq, and just below 1 million barrels per day 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, the IEA’s main headline data for 2020 is largely unchanged from last month. Oil demand growth is forecast to accelerate to 1.2 million barrels per day, 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 million barrels per day in January to comply with their new agreement. Meanwhile, non-OPEC production is forecast to grow by 2.1 million barrels per day 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.
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, the IEA said, adding, “We have such a well-supplied and increasingly globalised market will help us to face these challenges.”