Crude oversupply eases, China’s demand resists – IEA

LONDON (ICIS)–Crude oil global stocks remain “impressive” but started to slow down in the third quarter while demand for crude products within the “maligned” Chinese economy resisted better than expected, the International Energy Agency (IEA) said on Tuesday.

Crude oil oversupply in China has continued to increase in the last months with the country accumulating almost 60m bbls out of a current 147m bbls of global stock builds, said the IEA.

The Paris-based agency said stock builds decreased in the third quarter thanks to refiners ramping up throughputs in July and August to take advantage of strong margins due to “lofty” gasoline cracks.

“In doing so, OECD [Organisation for Economic Co-operation and Development] refined product stocks have risen by over 50m bbls to sit at their highest level in more than four years. Product stocks have also built in Asia, notably in Singapore where inventories added an impressive 8m bbl over the [third] quarter,” said the IEA.

The global oversupply, however, did not stop crude oil prices rebounding in September with a further rally in early October on the back of a potential decline in US production and forecasts that the market could rebalance in 2016. Crude oil prices remain, however, well below the $100/bbl level last achieved in 2013.

Crude oil contracts to be delivered in November were trading in Europe at 12.00 London time on Tuesday at $49.77/bbl for Brent, of reference in Europe, and $46.89/bbl for the US referential West Texas Intermediate (WTI).

“The present global oversupply is helping markets shrug off current geopolitical tensions with little initial bullish sentiment triggered by escalating Russian military intervention in Syria. Oil markets also paid little attention to the US Federal Reserve’s decision to keep interest rates unchanged,” said the IEA.

“Nonetheless, markets are still relatively volatile compared to historical averages and there is evidence to suggest that there is still significant uncertainty as to where oil prices are heading in the short-term. This is manifested in market participants paying still-hefty premiums on options contracts to insure themselves against price swings,”

China’s demand for crude oil products during the third quarter was better than previously expected, said the agency, despite the “much maligned” state of the country’s economy. In fact, China’s demand growth totalled 600,000 bbls/day during the third quarter, accounting for almost a third of the global demand growth for the three-month period.

“Surprisingly resilient Chinese oil demand data have come in; our preliminary August estimate posted a near double-digit percentage point gain in y-o-y [year-on-year] terms despite the otherwise ailing macroeconomic backdrop. Gasoline escalates sharply despite reports of falling car sales, as even these lower numbers support an expanding vehicle pool,” said the IEA.

With low prices and the still “impressive” oversupply, the IEA said demand for crude oil and its derivatives peaked in the second quarter of 2015, with demand growth at 1.9m bbls/day year on year, thanks to better performing economies within the OECD countries and the resilience of demand in the US and China.

The IEA said demand for crude oil in 2016 will slow down and return to its long-term trend. While demand growth in 2015 is expected to average 1.8m bbls/day, the figure in 2016 is expected to be a third lower at 1.2m bbls/day.

“The demand outlook for 2016 is likely to return to long-term trend as recent downgrades to the macroeconomic outlook and expectations that crude oil prices will not see repeats of the heavy losses of 2015 filter through,” said the agency.

In line with what the Organisation of Petroleum Exporting Countries (OPEC) said on 12 October, low prices are taking their toll regarding capital expenditure (capex) coming from oil producers. This in turn is causing non-OPEC countries supply growth to “disappear fast” with countries like the US, Russia and Norway being “hit hard” as a consequence.

Refinery margins fell in September, the agency added, on the back of lower gasoline and fuel oil cracks. While diesel cracks remained stable, naphtha “proved surprisingly strong” compared to gasoline. Margins however fell during the month $2-3/bbl and “twice as much” in the US Gulf Coast. Singapore was the only hub which achieved higher margins, thanks to rising gasoline and distillates cracks.

“Oil at $50/bbl is a powerful driver in rebalancing the global oil market, but the big question is just when will equilibrium be restored. To be sure, the world is using more oil and high-cost supply – primarily non-OPEC – is being forced out,” said the IEA.

“But a projected marked slowdown in demand growth next year and the anticipated arrival of additional Iranian barrels – should international sanctions be eased – are likely to keep the market oversupplied through 2016 … How quickly Iran can bring those extra barrels to the market will make a big difference to 2016 dynamics,” it concluded.