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It’s products and not crude that is bearish

Published Thursday, July 14th, 2016

Looking at the latest supply/demand forecast from the IEA one has the impression that the agency is the most bullish of the three. First of all, the IEA, just like the other two agencies does not expect global demand to take a hit from Brexit. Second of all, they see the smallest stock build in the first half of this year. Their estimate it at 800,000 bpd. This compares with the EIA number of 1.11 mbpd and OPEC’s 1.83 mbpd. Third of all, the IEA has the highest call for OPEC oil for the rest of the year and for the whole of 2017. It is at 33.35 mbpd for 2H 2016 and 33.68 mbpd for 2017. Fourthly, as a result of the high demand for OPEC crude the daily stock changes are rather bullish as far as the IEA is concerned. Global oil inventories are expected to fall 350,000 bpd in the coming six months, by the same extent in the first half of 2017 and by 1 mbpd in 2H 2017.These stock changes are based on an OPEC production of 33 mpd. This is the level OPEC produced in 2Q this year, the IEA says. If you, however, go with the June estimate the oil balance will be 200,000 bpd looser. The IEA estimates OPEC’s June production to be at 33.21 mbpd, up 400,000 bpd on the month and at an eight-year high.

As bullish as these predictions look they come with a huge caveat. In the IEA’s own words “the existence of very high oil stocks is a threat to the recent stability of oil prices”. The agency sees OECD industry stocks growing from 3.015 billion bbls at the end of 2015 to 3.049 billion bbls by the end of 1Q 2016. In April they rose by another 11 million bbls and in May they hit a fresh all-time high of 3.074 billion bbls. Preliminary estimates put stock overhangs in the OECD part of the world at 3.075 billion bbls at the end of 2Q.

It is not crude but products that threaten any potential price recovery. Although global refinery runs fell by 800,000 bpd in 2Q this year they are expected to jump by 2.4 mbpd this quarter. This logically means that global crude oil inventories should fall and product stocks increase. The IEA fears that unless there is a significant uptick in global oil demand the build in the latter will exceed the draw in the former which could easily weigh in prices.

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Posted by Tamas Varga

Tamas Varga has been in the oil industry since 1992 and with PVM for 18 years. During his time in the industry he has gathered a range of experience in the oil markets. At PVM Tamas is in charge of data collection and analysis.