The OPEC monthly oil market report covers major issues affecting the world oil market and provides an outlook for crude oil market developments for the coming year.
Oil market highlights
Crude Oil Price Movements
The OPEC Reference Basket (ORB) declined by around 21% to average $26.50/b in January. Ongoing excess supply, the weakening Chinese economy and lower seasonal heating demand continued to weigh on the market. Crude oil futures prices also declined significantly, with ICE Brent down $6.98 to average $31.93/b and Nymex WTI losing $5.67 to average $31.66/b. The Brent-WTI spread narrowed to just 15¢/b.
World economic growth has been revised down to 2.9% for 2015 and 3.2% for 2016. OECD growth in 2016 has been revised lower to 2.0%, the same pace as in the previous year. In the emerging economies, China’s growth in 2016 has been revised down slightly to 6.3% while India’s growth has been revised lower to 7.5%. Meanwhile, increasing difficulties in both Brazil and Russia are seen pushing both economies into recession for the second consecutive year.
World Oil Demand
World oil demand growth in 2015 is expected to increase by 1.54 mb/d, unchanged from the previous report, to average 92.96 mb/d. In 2016, world oil demand is expected to grow by 1.25 mb/d, representing a marginal lower adjustment of 10 tb/d from the previous forecast, to average 94.21 mb/d. Non-OECD countries will continue to contribute the bulk of oil demand growth this year.
World Oil Supply
Non-OPEC oil supply growth in 2015 has been revised up by 90 tb/d to 1.32 mb/d, mostly driven by higher-than-expected fourth quarter data. In 2016, non-OPEC oil supply is projected to decline by 0.70 mb/d, following a downward revision of 40 tb/d, mainly due to announced capex cuts by international oil companies, the fall in active drilling rigs in the US and Canada, and a heavy annual decline in older fields. OPEC NGL production is expected to grow by 0.17 mb/d in 2016, up from 0.15 mb/d last year. In January, OPEC crude production increased by 131 tb/d to average 32.33 mb/d, according to secondary
Product Markets and Refining Operations
US refinery margins remained weak, weighed down by the poor performance of the middle distillate market, despite a temporary boost in heating fuel demand from snow storms on the US East Coast. In Europe and Asia, refinery margins edged higher on the recovery seen at the bottom of the barrel due to stronger regional demand.
Dirty tanker fright rates rose on average in January, supported by higher Suezmax rates on the back of strong tonnage demand and delays in the Turkish straits. Both VLCC and Aframax rates, however, saw declines. In the clean tanker market, freight rates showed significant gains over the previous month, both East and West of Suez, on the back of steady demand.
OECD commercial oil stocks fell in December to stand at 2,974 mb. At this level, inventories are around 310 mb higher than the latest five-year average. Crude and products showed surpluses of about 249 mb and 61 mb, respectively. In terms of forward cover, OECD commercial stocks stood at 63.7 days in December, unchanged from the previous month and some 6.1 days higher than the latest five-year average.
Balance of Supply and Demand
Demand for OPEC crude in 2015 is estimated to average 29.8 mb/d, representing an increase of 0.1 mb/d over the previous year and lower by 0.1 mb/d compared to the previous report. The global oversupply for 2015 is estimated at 2.0 mb/d. In 2016, demand for OPEC crude is expected at 31.6 mb/d, a gain of 1.8 mb/d, higher than last year.
Review and outlook of global oil demand
The year 2015 has been exceptional for oil demand. Oil consumption reached above 1.5 mb/d, the second highest level of growth in the past ten years, with 2010 being the highest. In contrast to 2014, both OECD and non-OECD contributed to this increment, growing by 0.4 mb/d and 1.1 mb/d respectively. This growth was propelled by lower oil prices encouraging transportation fuel demand in addition to solid gains in the petrochemical sector in China, US and Asia-Pacific.
For 2016, oil demand is anticipated to grow by around 1.3 mb/d, below last year’s growth but still broadly robust. Demand in the OECD countries is projected to grow by 0.2 mb/d, with the US leading growth, while Asia-Pacific is seen declining and Europe is expected to be broadly flat compared to the previous year. Positive projected growth in the US economy and continued healthy growth in the road transportation sector are seen outweighing downside assumptions for overall US oil demand, mainly linked to fuel substitution and vehicle efficiencies.
In OECD Europe, the strong demand growth seen in 2015 is not expected to be repeated this year. Significant economic uncertainties, along with ongoing efficiencies and fuel substitution in the road
transportation sector, are expected to weigh on oil consumption in the region. However, this could be offset by expanding demand in major economies – particularly Germany and the UK – due to the low oil price environment despite high end-user taxes. In OECD Asia-Pacific, oil demand assumptions for Japan in 2016 are less promising compared to the previous year, mainly as a result of projected slower economic growth and expectations that more than handful of nuclear plants will restart operation.
In the non-OECD, oil demand growth in 2016 is expected to be around 1.1 mb/d, even with slightly lower
growth from China. The outlook for China, with GDP growth lower than in 2015, is based on the assumption that transportation and industrial fuels lead the product mix in 2016, despite continued fuel quality programmes targeting lower emissions in the transportation sector.
Oil demand growth is projected to be steady in Other Asia, led by India with growth of 170 tb/d on top of already strong growth of 210 tb/d in the previous year. The impact of subsidy reductions in the Middle East and the economic performance of Latin America will influence oil demand growth in these regions. However, the weaker performance in the economies in both regions and the impact of subsidy reductions could influence oil demand growth.
In terms of Non-OECD product demand, middle distillates are projected to grow the most, followed by transportation fuels, mainly during the summer Olympic Games in Brazil. However, the projected growth in transportation fuels is expected to be less than last year, especially in case of India, with diesel consumption impacted negatively by a temporary government ban limiting the use of diesel vehicles with large engines in big cities. Crude oil for direct use and petrochemical feedstocks are projected to contribute positively to product demand growth.
Any better-than-expected performance of global economic growth, improvement in industrial activities, and a return to normal weather patterns could further support higher oil demand growth in the current year.