Oil fundamentals bearish as supply set to outstrip demand

As I suggested the EIA in its latest Short Term Energy Outlook report lowered its oil demand growth forecast for both 2013 and 2014… the second demand reduction in the last two monthly reports. The slowing of global oil demand continues to be the single main negative fundamental price driver keeping a lid on oil prices. The main oil related highlights from the report are shown below. The OPEC report is due out Friday while the IEA report hits the media airwaves on Tuesday, May 14. I expect both of these reports to also reduce their forecasts for oil demand growth.

  • EIA estimates that global liquid fuels consumption outpaced production in the first quarter of 2013, resulting in an average draw in global liquid fuel stocks of 1.2 million barrels per day (bbl/d), which is much higher than the average 0.3-million-bbl/d draw over the last 5 years but consistent with the average 1.1-million-bbl/d draw over the last 10 years. EIA expects world oil production to exceed consumption in the second quarter of 2013, resulting in an average 0.5-million-bbl/d build in global oil stocks, which is consistent with the recent decline in crude oil prices. EIA expects the world oil market to tighten somewhat in the third quarter of 2013 as world demand reaches its summer peak, and to loosen again in the last quarter of the year as world supply grows.
  • World liquid fuels consumption grew by 0.7 million bbl/d in 2012 to reach 89.0 million bbl/d. EIA expects growth will be higher over the next two years because of a moderate recovery in global economic growth so that world consumption grows by 0.9 million bbl/d in 2013 and by 1.2 million bbl/d in 2014.
  • Non-OECD Asia, particularly China, is the leading contributor to projected global consumption growth. EIA expects refinery crude oil inputs in China to increase in 2013 as new refining capacity continues to come on line and investment in the property market and infrastructure sectors expands. Recent indicators of weaker industrial data at the beginning of 2013 signaled slower economic growth than in prior years and a downside risk to robust oil demand growth. EIA estimates that liquid fuels consumption in China increased by 380,000 bbl/d in 2012. Projected consumption in China will increase by 450,000 bbl/d in 2013 and by 470,000 bbl/d in 2014, albeit still lower than the average annual growth of about 520,000 bbl/d from 2004 through 2012.
  • OECD liquid fuels consumption fell by 0.6 million bbl/d in 2012. EIA projects OECD consumption to decline by an additional 0.4 million bbl/d in 2013 and 0.2 million bbl/d in 2014, largely because of declining consumption in Europe and Japan.
  • EIA projects non-OPEC liquid fuels production will increase by 1.1 million bbl/d in 2013 and by 1.8 million bbl/d in 2014, an upward revision in the 2014 growth rate of 0.2 million bbl/d from last month's STEO. North America accounts for most of the projected growth in non-OPEC supply over the next two years because of continued production growth from U.S. tight oil formations and Canadian oil sands. EIA expects non-OPEC supply to also grow in Central and South America by an average of 160,000 bbl/d each year over the next two years, as Brazil and Colombia bring new production on line.
  • The U.S. crude oil production forecast has been revised upward by 120,000 bb/d in 2013 and 310,000 bbl/d in 2014 from last month's STEO. Production will rise from an average of 7.1 million bbl/d in the first quarter of 2013 to 8.5 million bbl/d in the fourth quarter of 2014. The growing supply of domestic light crude oil in the Midcontinent has already prompted both midstream and downstream changes. Pipelines like Seaway that were once used to carry imported oil up from Gulf Coast ports to reach Midwest refiners have been reversed and are moving inland crude oil down to the Gulf, and their capacity is being dramatically expanded. New pipeline infrastructure is also under construction, including the southern portion of the Keystone XL project, which is slated to be in operation by year-end, and more has been proposed. There have also been major developments in rail transport, where shipments of crude increased dramatically in 2012 compared to 2011. Significant changes in the refining industry are expected over the next few years to accommodate this fast-growing domestic supply of light-sweet crude oil.
  • Projected OPEC total supply falls by 0.5 million bbl/d in 2013 and then rises by 0.1 million bbl/d in 2014. Most of the decline in 2013 comes from Saudi Arabia in response to non-OPEC supply growth, while Iraq and Angola account for most of the increase in 2014.
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