A brief note on global oil supply/demand balance. May’s Oil Market Report from the International Energy Agency (IEA) shows demand stable to rising, and supply moving down.
The report noted (we quote):
- Crude prices firmed on the back of unscheduled supply outages in Nigeria, Ghana and Canada that exceeded 1.5 m/d by early May. This more than offset bearish sentiment in the wake of the mid-April Doha output talks…
- Global oil supplies rose 250 kb/d in April to 96.2 mb/d as higher OPEC output more than offset deepening non-OPEC declines. Y-o-y world output grew by just 50 kb/d in April versus gains of more than 3.5 mb/d a year ago. 2016 non-OPEC supply is forecast to drop by 0.8 mb/d to 56.8 mb/d.
- Global oil demand growth for 1Q16 was revised upwards to 1.4 mb/d, led higher by strong gains in India, China and, more surprisingly, Russia. For the year as a whole, growth will be around 1.2 mb/d, with demand reaching 95.9 mb/d…
- Stock builds are beginning to slow in the OECD; in 1Q16 they grew at their slowest rate since 4Q14 and in February they drew for the first time in a year. In March OECD commercial inventories fell by a slim 1.1 mb, with April preliminary data suggesting that stocks rebounded while oil held in floating storage rose.
“Unscheduled supply outages” may become more significant due to fragile geopolitics in Venezuela, Nigeria, and Libya. (Venezuela is on the brink of social chaos, and the ongoing drought is threatening to shut down the Guli Dam, which supplies about half the country’s electricity. Nigeria is facing a new terrorist insurgency, the Niger Delta Avengers, who are targeting oil production in reprisal for the Nigerian president’s anti-corruption campaign, which is disrupting long-standing networks of theft, cronyism and patronage.)
Recent data have also shown unexpectedly robust crude oil import growth in India and China.
Any growth inflection, and especially a shift in negative sentiment about China, could shift market perceptions and continue to support the recovery of crude prices, which have nearly doubled from February’s lows.
Investment implications: Global oil supply/demand balance is tightening on the heels of geopolitical supply disruptions in Nigeria and Libya, and potential disruption in Venezuela. Positive growth and psychology inflections could also continue to support crude oil’s rally. We favor U.S. producers; for the bold, we suggest a careful selection of well-run but financially challenged producers whose viability will become clear as crude advances. Oil services are also worth attention, as U.S. producers look to bring drilled-but-uncompleted wells online.