Every Year Oil Demand Is Up In H2 Vs H1, Expecting +50 Million Barrels Per Month In H2/17
Mar 29, 2017
There is a strong logical case for oil hitting $60 before year end if OPEC/non-OPEC extend their ~1.8 million b/d and can manage reasonable (ie. >80%) compliance, even if US oil production continues to grow. Why? EVERY YEAR, oil demand is ALWAYS up strongly in H2 vs H1. Every year, oil demand follows a seasonal pattern. The low demand period every year is Q1. Then oil demand starts to pick up slightly in Q2, but the big increases in oil demand are every year in Q3 and Q4. Oil demand in H2 is expected +~1.7 million b/d, or ~50 million barrels per month of increased oil demand vs H1/17.
A couple key examples of the reasons why oil demand is up seasonally starting in Q2 are the following. (i) It’s the hot season in Saudi Arabia, which means that Saudi Arabia’s consumption of oil for electricity generation always peaks in the summer, and tends to add 0.3 to 0.4 million b/d to demand vs other times of the year. (ii) US refineries typically use >1 million b/d of crude oil inputs in Q3 vs Q1. Its peak driving season in the US and other countries. In the US, Q1 is always the lowest miles driven period each year and the pattern is always similar to 2016. In 2016, there were 735.8 million miles driven in Q1/16, 821.2 million miles in Q2/16 (+11.6% vs Q1), 822.7 million miles in Q3/16 (+11.8% vs Q1), and 790.3 million miles in Q4/16 (+7.4% vs Q1). The increased US driving demand starting in Q2 is why the major US refinery turnarounds (low oil demand period) tends to be in Feb/March every year, and why US refinery demand for crude peaks in Q2 and Q3.]
The below table shows the current EIA, IEA and OPEC estimates of world oil demand for 2015, 2016, and 2017. The quarterly patterns for oil demand are all the same. It shows how Q2 is up from the lower period Q1. But the big increases come in H2 vs H1, and, for the 3 year period, ranged from +1.4 to +2.0 million b/d
The always low global oil demand period in Q1 is the key reason why OECD oil inventories were “only” down slightly in Feb despite reported strong compliance. On March 26, 2017, OPEC announced [LINK] that the Joint OPEC/Non-OPEC Ministerial Monitoring Committee reported that “as at February 2017, the OPEC and participating non-OPEC countries achieved a conformity level of 94 per cent, an increase of 8 percentage points over the January 2017 performance. This demonstrates the willingness of all participating countries to continue their cooperation”. Note that most use ~1.8 million b/d for the total cut, but it is actually 1.731 million b/d (1.173 million b/d from OPEC, and 0.558 million b/d from non-OPEC). In theory, all other things being equal, a 94% compliance to 1.731 million b/d would have cut oil inventory by 38.8 million barrels in Feb. But that wasn’t the case in Feb with higher than expected US refinery turnarounds and continuing increasing US oil production. The IEA tends to get the most market following for its Oil Market Report March 2017 [LINK], which highlighted “Preliminary data show a modest draw of 5 mb in February despite further builds in US crude”. The EIA’s Short Term Energy Outlook March 2017 [LINK] noted “EIA estimates that global oil inventories fell at a rate of almost 1.0 million barrels per day (b/d) in February, which would be the third-largest monthly decline rate since the beginning of 2014.”
Global oil inventories are still well above the 5 year range. There are a number of estimates, but global OECD commercial stocks are probably still ~275 million barrels above the 5 year range at the end of Feb. Assuming there is still ~260 million barrel surplus at March 31/2017, its reasonable to look at a June 30 surplus of ~200 million barrel assuming ~90% compliance, increasing US oil production, and a more normal Q2 increasing demand of ~0.5 to 0.6 million b/d.
There are both positives and negatives to correcting surplus global oil inventories. Positives to correcting oil inventories with declining YoY oil production in several oil producing countries like Mexico, Colombia, Argentina, and China. And there are negative wildcards apart from the increasing US oil production such as the return of oil in Libya and Nigeria and the full year impact of 2016 production adds in places like Kashagan.
But once we get to 200 million barrels or below, the normal seasonal oil demand increase in H2/17 should, by itself, eliminate this surplus within 4 to 6 months. Then a continuation of the OPEC/non-OPEC cuts, even without perfect compliance, should provide enough cushion to absorb these negative wildcards of US oil production and stronger production surprises elsewhere such as Libya.
As inventories track down with the always increasing oil demand each summer, this should be the setup that can lead to oil getting back to $60 by year-end 2017. Oil hitting $60 in late 2017 is likely not to be lasting too long as $60 oil will be a temptation for OPEC members and Russia to tweak up production. But with Saudi Aramco’s planned 2018 IPO, we can see oil hanging in the $55 range. All in all, the always higher summer demand for oil should provide for higher oil prices and a change in tone from negative to positive on oil.