Capitulate
Is the oil market finally getting ready to capitulate? Oil has created global market turmoil as the global oversupply was used as an indicator that the global economy is starting to fall apart. A market now driven by fear and the expectation of more Iranian oil after sanctions were lifted. Yet after a major market washout after all of the markets worst fears were realized the market in oil is trying to find a bottom.
Oils swansong was cemented in part on the back of slowing demand fears especially from a slowing China. Yet the reality of Chinese oil demand does not quit fit that narrative. China’s implied oil consumption grew 2.5 per cent in 2015 on strong gasoline and kerosene use. China consumed a record 10.32 million barrels per day (bpd) of news seems to be good as the market says the number is weak enough to get more stimulus from the Chinese government but not bad enough to suggest a total economistic meltdown in China. Oil in 2015, up 256,000 bpd on the year, according to preliminary Reuters calculations based on government data. On the other hand, industrial output in China rose 5.9 percent from a year ago, a perfect recipe for more oil demand.
Yet the International Energy Agency (IEA) is trying to cloud that perspective with its latest report. The IEA says that as oversupply, mild temperatures and grim economic news check growth demand, non-OPEC output falls year-on-year for first time since 2012, The IEA says that exceptionally mild temperatures in the early part of the winter in Japan, Europe and the United States -- alongside weak economic sentiment in China, Brazil, Russia and other commodity-dependent economies -- saw global oil demand growth flip from a near five-year high in the third quarter of last year, at 2.1 million barrels per day (mb/d), to a one-year low in the fourth quarter of 1.0 mb/d, the IEA Oil Market for January.
Persistent oversupply, bloated inventories and a slew of negative economic news pressured prices so that by mid-January crude oil touched 12-year lows. The OMR outlook for 2016 has demand growth moderating to 1.2 mb/d. Global oil supplies expanded by 2.6 mb/d last year, following hefty gains of 2.4 mb/d in 2014. By last December, however, growth had eased to 0.6 mb/d, with lower non-OPEC production that pegged below year-earlier levels for the first time since September 2012.
OPEC crude output eased by 90 000 barrels per day (90 kb/d) in December to a still-lofty 32.28 mb/d, including newly rejoined Indonesia. Iran, now relieved of sanctions, insists it will boost output by an immediate 500 kb/d. Our assessment is that around 300 kb/d of additional crude could be flowing to world markets by the end of the current quarter.
Global inventories rose by a notional 1 billion barrels in 2014-15, with the fundamentals suggesting a further build of 285 mb over the course of this year. Despite significant capacity expansions in 2016, this stock build will put storage infrastructure under pressure and could see floating storage become profitable.
Global refinery runs averaged 79.5 mb/d in the fourth quarter of 2015, down 0.3 mb/d from the estimate in last month's OMR due to lower-than-expected throughputs in non-OECD Asia except China and a very high maintenance schedule in October. Global refinery margins weakened in December as middle distillate cracks fell and overwhelmed the resilience of gasoline and naphtha.
In addition to these highlights and detailed analysis of demand, supply, prices and refining developments, and their short-term outlook, the January OMR features an article that details the effects of Iran's post-sanctions return as a full player in the oil markets. Another looks at how warmer early-winter weather in parts of the Northern Hemisphere has suppressed demand for OECD oil, while a third examines the surge in global oil storage capacity foreseen for this year and beyond. A fourth in-depth feature reports that floating storage is 'slowly sailing away', while a fifth assesses the dampening effect of subsidy cuts on the already weaker Saudi Arabian demand outlook.
Of course how much of this news seems priced in. After last week’s epic collapses, it is possible that last week was the capitulation move as hedge funds amassed a record short position. After the market seemed to rally after China’s data it looks like we have found at least a short term bottom.