According to the KBC Energy Economics Oil Market Outlook, front month Brent crude futures continued to fall in early October, with a stubborn excess of crude in the physical oil market. The search for a price floor to the oil market took on a whole new dimension with a news report that Saudi Arabia was quietly telling certain oil market participants that Riyadh is comfortable with markedly lower oil prices, perhaps down to US$ 80/bbl, for an extended period. This led to a further sharp sell off in crude futures with front month Brent closing at US$ 83.78/bbl on 15 October, falling by more than US$ 6/bbl in just three trading sessions. Oil prices subsequently stabilized at approximately US$ 85/bbl over the balance of the month, with some support from a report that Saudi Arabia supplied 328 000 bpd less crude to the market in September than a month earlier. However, in early November, front month Brent fell back to below US$ 83/bbl when Saudi Arabia applied another round of cuts (of close to US$ 0.50/bbl) to its term price differentials for December crude supplies to the US.
KBC expects crude futures to hold up in November on nascent initiatives by OPEC members to prepare for a cutback agreement at the upcoming OPEC meeting. They hold that OPEC will agree to a reduction in its production ceiling, pushing Brent back up to approximately US$ 90/bbl in December with support from peak winter demand, but that the agreement will be relatively weak. In January, with reduced levels of refiner crude buying ahead of seasonal maintenance, KBC believes that Brent prices will fall back to US$ 85/bbl as the market signals the need for further OPEC action (and especially if full Iranian crude export volumes were to resume on a nuclear deal).
Global oil demand is forecast to grow by +0.86 million bpd this year which reflects a downward revision by 85 000 bpd from KBC’s previous report. This is because both actual and estimated growth were revised down for all quarters of 2014, meaning that growth in Q3 appears to have been below 0.5 million bpd, which is even weaker than KBC estimated last month. KBC’s oil demand estimate for 2014 was revised down by 55 000 bpd because of weaker assessments for gas/diesel oil demand in the second half of this year. European oil demand is forecast to decline by 190 000 bpd this year, which exceeds the 110 000 bpd drop in 2013. Total Asian oil demand is forecast to grow by 630 000 bpd in 2014, up from 430 000 bpd in 2013 and rising to 720 000 bpd in 2015.
Global oil supply increased sharply by 400 000 bpd to 93.6 million bpd in October, compared with the previous month. Global oil markets are set to see additional volumes in the outlook period to early 2015 with continued growth in the USA, Canada and Brazil. Further incremental barrels will come from the North Sea, where output has been subdued in previous quarters due to maintenance, as new fields are scheduled to come online before year end. Countering these increases, Mexico’s short term production is expected to fall further. The FSU will see a stable output versus last year, but month on month decreases are likely.
In October, refining margins weakened from September levels in the main regions, as product markets remained well supplied amid withering demand. The US experienced extremely high refinery outages this autumn with an average of 1.9 million bpd of capacity down in October, compared to 1.1 million bpd last October. KBC expects US product cracks to appreciate as stock draws resulting from these outages are felt in the market, leading to firmer refining margins. Margins in Asia are likely to improve in the outlook period as demand picks up seasonally, while European margins are expected to ease as more refineries come back onstream from planned maintenance, especially as Dubai moves back to a more normal discount’ below dated Brent.
Adapted from a press release by Emma McAleavey.
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