KBC observes, in its recently released Quarterly Oil Market Outlook (QOMO), that crude oil prices have come under sustained downward pressure during the third quarter of 2014 (Q3), with front month Brent falling by approximately US$ 17.50/bbl from US$ 112.36/bbl at the end of June to US$ 94.67/bbl at the end of September.
Oil prices have continued to fall in early October. There has been a persistent excess of mainly light sweet crude in the Atlantic Basin physical oil market as weak oil demand has coincided with rising oil supplies. In the absence of any new threats of disruption to oil/energy supplies, the geopolitical risk premium has been stripped out of the price of crude, leaving the market to search out a point of support to oil prices. They have not yet fallen to a level that would shut in any crude production, as uneconomic, while any demand response to lower oil prices in US dollar terms has been greatly diluted by the strength of the US dollar.
Thus, with a clear excess of crude in the market, only a reduction in crude supplies can bring a quick rebalancing of oil market fundamental. Indeed, KBC has expected that Saudi Arabia would make informal reductions to its level of supply as the prime measure of correction in the early stages of rebalancing global oil supplies.
Since their last quarterly report, KBC has revised down their assessment of world oil demand for 2015 by 0.8 million bpd, due mainly to reduced expectations of economic growth. In contrast, non-OPEC supply is expected to increase even more strongly than previously anticipated, by 1.9 million bpd versus 2014, and 0.4 million bpd above their previous assessment due mainly to further additions in North America, especially of surging light tight oil production in the US.
Together with some change in oil stocks, the overall effect is a 1.5 million bpd downward revision to the KBC assessment of demand for OPEC crude to 29.2 million bpd in 2015. In the following year, KBC expects a further robust increase in non-OPEC oil supplies of 2.0 million bpd compared to growth in world oil demand of 1.4 million bpd. Consequently, in 2016, KBC expects the call on OPEC crude to fall further to 28.7 million bpd, which is some 1.3 million bpd lower than the level of 30.0 million bpd shown for the current year, 2014.
The reduction in the KBC assessment of the call on OPEC crude impose significantly greater pressures of surplus management on the oil cartel, especially at a time of rising production capacity. Between 2014 and 2016, KBC expects OPEC capacity to increase by 1.1 million bpd, while demand for OPEC crude falls by 1.3 million bpd, which together add 2.4 million bpd to the volume of crude OPEC would be required to hold off the market in order to balance global oil supplies. This incremental OPEC spare production capacity would be even greater of effective Libyan capacity rises to above our assumed level of 1.2 million bpd or if effective Iranian capacity exceeds 3.1 million bpd.
After the immediate market imbalance is corrected, largely as a result of seasonally stronger oil demand during the winter period and lower Saudi production, there will be recurrent pressures on OPEC to rein in production over the next couple or years, which will require participation from a wider group of members. Given the greater pressures on OPEC of supply side management, KBC Energy Economics has revised down its forecasts of Brent crude for 2015 by US$ 6/bbl to US$ 105/bll and for 2016 by US$ 10/bbl to US$ 107/bbl.
International refining margins remained mixed across the three main regions last month, compared with August levels. Europe and Asia dominated, with margins firming on persistently weak crude prices. However, in the US Gulf Coast region, margins based on FCC/Coking Maya/Mars and LLS 3-2-1 (which is heavily weighted to gasoline) both eased, squeezed by weaker product markets, but still markedly above their European and Singapore counterparts.
Looking forward to the end of the review period (December 2016), KBC Energy Economics forecasts that both Asian and European margins will move in a relatively low range as significant new refinery capacity additions influence both markets. In total, approximately 1.6 million bpd of new refining capacity is expected to be added between August 2014 and April 2015. The refinery additions are largely centred on the Middle East, China and India, with product supplies from these refineries mainly impacting the Asian and European product markets, thus curbing margins. US refiners will continue to enjoy favourable margins due to the availability of cheap feedstock.
Adapted from a report by Emma McAleavey.
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