Crude prices continue to rise during Feb

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During mid-Feb 16, in a bid to stabilize the oil market, Saudi Arabia, Qatar, Russia and Venezuela agreed to freeze their respective oil production at Jan 16 levels with a caveat that other producers follow suit. This led to a short term oil price rally that pushed prices to a 3-month high level of $35.62/b of OPEC oil. However, despite welcoming the decision to freeze output, Iran’s oil minister said in a recent announcement that it would consider joining other oil producers in seeking ways to rebalance the global oil market only after it reaches a pre-sanction crude output of 4 mb/d, a level not seen since 2008.

 As a result of this announcement, oil prices fell almost 3% on 14-March-16. An official also said that the country plans to boost oil production by 1 mb/d by June-16 and expects oil exports to rise to 2 mb/d by month ending 20-March-16 from almost 1.75 mb/d during the previous month.

Sentiments surrounding oil market largely remained positive after multiple indicators pointed to a fall, albeit gradually, in production primarily from shale producers in the US in addition to both OPEC and non-OPEC oil producers being in talks to freeze production.

Moreover, although demand side factors are yet to show a turnaround (with Chinese demand yet to recover amid economic slowdown) higher demand in other markets, primarily India, and other smaller non-OECD Asian countries remain strong. According to IEA’s monthly report, global oil demand declined to its lowest level in a year during 4Q-15 to 1.2 mb/d as compared to 4Q-14 primarily due to a decline in demand from the US and China. For the full year 2016 the agency expects demand to grow by 1.2 mb/d.

Meanwhile, according to IEA, OECD commercial inventories increased by 20.2 Mn barrels during Jan 16 equivalent to 32.7 days of demand cover; whereas, preliminary data for February-16 suggests OECD inventory drawdown for the first time in a year. Furthermore, in a positive development for the oil market, US oil rigs declined for the 12th consecutive week by 6 to 386, its lowest level on record, according to data released by Baker Hughes.

Average monthly OPEC oil price increased by 8.4% to $28.72/b during Feb 16 whereas the gains during the first half of March-16 stood at an even higher 17.2%. Kuwait oil was up by 11.9% during Feb 16 whereas Brent oil surged 5.6% during the month.

OPEC’s monthly report kept total world oil demand growth for 2015 unchanged from the last month at 1.54 mb/d to reach 92.98 mb/d although adjustments were made within the regions. Oil demand in the US surged by 0.1 mb/d or 0.5% year-on-year during Dec 15 primarily on the back of higher gasoline demand for the transportation sector. The monthly gain comes despite a fall in demand during the previous two months (Oct 15 and Nov 15).

Meanwhile, demand remained weak in Canada during the year due to a fall in demand for gasoline, LPG and residual fuel oil. The year was also positive for the whole of European region with all the quarters showing higher demand resulting in a demand growth of 0.30 mb/d. Meanwhile in OECD Asia Pacific, oil consumption declined by 0.06 mb/d led by a fall in demand from Japan.

Oil demand growth for 2016 was also kept unchanged at 1.25 mb/d to average at 94.23 mb/d despite upward adjustments in Other Asia, Asia Pacific and Europe on the back of higher-than-expected oil demand that were offset by downward adjustments for Latin America and FSU. A mild winter season in the US led to decline in demand for distillates which fully nullified higher demand for gasoline and jet fuel during the first two months of 2016.

 Meanwhile, oil demand in OECD Europe was weak according to preliminary data for Jan 16 that showed a year-on-year decline of 50 tb/d as higher demand for diesel and fuel oil was more than offset by a decline in demand for jet fuel/kerosene and LPG. The region continues to be marred by several uncertainties relating to economic performance although low oil price could provide a boost to oil demand in the region.

An unusually warm weather also affected oil demand in OECD Asia Pacific, especially in Japan where commodity substitution played a key role in declining use of oil for electricity generation. Contrastingly, oil demand continued to post robust growth in South Korea during Jan 16 rising by more than 5% year-on-year or 0.11 mb/d. Another bright spot in the region was India that recorded almost 13% year-on-year rise in oil demand or more than 0.50 mb/d led by higher demand for gasoline, fuel oil and diesel. For the full year, India’s oil requirement is expected to grow by 4%-5%.

Non-OPEC oil supply growth in 2015 was once again revised upward by 100 tb/d to 1.42 mb/d to average at 57.09 mb/d after updated production data for 4Q-15 led to upward revision in supply from the OECD (+258 tb/d), Developing Countries (+48 tb/d) and FSU (+26 tb/d) partially offset by downward revisions of almost 0.33 mb/d in supply from Australia, Argentina and the Sudans. Upward revisions were also made to non-OPEC supply figures for Q1-15 (+63 tb/d) and Q2-15 (+31 tb/d). The OECD Americas region saw the biggest jump in oil supply during 2015 with a growth of 0.91 mb/d to reach total supply of 20.99 mb/d. Oil supply from OECD Asia Pacific remained unchanged as compared to the last month’s monthly report whereas, Developing Countries saw a marginal upward revision of 10 tb/d to average at 11.52 mb/d during 2015.

According to Bloomberg, OPEC oil production declined marginally by 79 tb/d to 33.06 mb/d during Feb 16 as production declines in Iraq and Nigeria were partially offset by higher production in Iran. Production by Saudi Arabia and Kuwait remained flat at 10.2 mb/d and 3 mb/d, respectively, during Feb 16. Iran continued to boost production during the month by producing an additional 140 tb/d during the month to reach an average production rate of 3 mb/d.

In terms of agreement on output freeze as was announced by Saudi Arabia, Qatar, Venezuela and Russia, Iran initially appreciated the move but its oil minister recently said that the country will only join talks on stabilizing oil prices once its output reaches pre-sanction levels of almost 4 mb/d. Iran is actively engaged in signing oil contracts with European customers by aggressively boosting production.

According to a news report, the country is seeking to boost oil output by 1mb/d by June-16 although analysts believe that it is a near impossible achievement to scale production to this level even by the end of the year, which would also require significant investment in the country’s oil industry.

The investment requirement was pegged at $200 Bn, according to the country’s oil minister, in order to develop joint fields and enhance recovery of oil reservoirs, as well as secure development targets. Meanwhile, Saudi Arabia’s foreign minister said that the Kingdom will continue to maintain its oil market share and the idea that it would cut its production while others maintain their share would be unrealistic.

On the other hand, the disruptions in Iraq and Nigeria resulted in a total oil production decline of 264 tb/d during the month. A pipeline stoppage in Turkey cut off almost 0.6 mb/d of crude from Kurdistan. On the other hand, an oil pipeline leak led Royal Dutch Shell to declare force majeure on almost 0.25mb/d of crude in Nigeria.

The overall production by OPEC members reached more than 90% of its capacity by the end of Feb 16. Among the member countries, Saudi Arabia continues to hold the largest buffer capacity at almost 2.3 mb/d followed by Libya with a spare capacity of 0.41 mb/d. The total share of production of Saudi Arabia stood at 30.9% almost in line with its share during Jan 16. On the other hand, the share of Iran increased from 8.6% in Jan 16 to 9.1% in Feb 16.

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