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Oil Market Surplus Likely to Persist for Rest of 2015

Oil
 

There has been considerable speculation recently that the oil market surplus is diminishing, with balance likely to return later this year. However, in our view, the oil market surplus has hardly been reduced at all so far, despite the sharp drop in prices since September last year. FGE’s projections indicate that, even though there has been some stimulus to world oil demand and a slight downturn in US tight oil output, these developments have been more than offset by the recent rise in total OPEC oil output to around 31 mmb/d. We still see a global stockbuild potentially through 2H 2015.

Since end-March, the build in total crude/products stocks in the USA has actually accelerated to some 10 mmb a week. Although almost all the stockbuild in recent months has been concentrated in US crude stocks, the surplus is now spreading to US products stocks too as refinery runs have stayed relatively high. The surplus is also starting to spread to other areas of the world. There are growing indications of unsold Nigerian cargoes in particular. Main products stocks in Singapore are now at the highest level for 5 years, not far below the record aggregate levels reached in April 2010.

At the start of 2015, FGE projected the potential global supply/demand surplus this year at 1.5 mmb/d, if OPEC output remained unchanged. Although world oil demand growth this year is now projected slightly higher at 1.1-1.2 mmb/d, while non-OPEC output growth is seen slightly lower at about 0.9 mmb/d, the rise in OPEC output since December of about 0.5 mmb/d has largely offset these changes. At the current level of OPEC output, our projections still point to the global stockbuild continuing through second half 2015 (albeit it at a slower pace than now), even if the demand/supply adjustments in reaction to low prices turn out to be slightly bigger than expected.

Of course, OPEC output could potentially move even higher later this year, if more Iranian volumes start to appear on the market, as we expect (whatever the exact timing of the lifting of sanctions). Iran’s condensate availability is rising on the back of rapidly-expanding natural gas supplies from South Pars, while fuel oil availability may also increase as internal fuel oil use is replaced by gas.  

There is also the possibility that, if prices rise much further, the large backlog of uncompleted wells in US tight oil tracts could be brought into play – reversing the recent slight fall in US tight oil output.

Some observers in the oil market have concluded recently that the tide has turned. However, in our view, although the tide is coming in slightly less quickly than before, it will keep rising for some time. The recent price recovery is likely to reverse again soon, as the stocks surplus keeps on building.  

 

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