Gravity finally wins

Oct 11, 2016 1:38:18 PM EST

As the monthly IEA report shows rising OPEC production, the market is brought swiftly back to the reality that intentions and actions are two different things. After umpteen days of rallying, crude prices are finally letting some air out of the tires. Hark, here are seven things to consider in oil markets today: 

1) While focus on global supply remains front and center due to ongoing OPEC shenanigans, it seemed appropriate to highlight a demand-side success story. Indian crude imports reached the highest on our records last month, at over 4.3 million barrels per day, as broad-based demand strength continues.

This trend of strong domestic demand is affirmed by our ClipperData relating to products too: gasoline imports continue to rise, while gasoline exports are dropping. The force is strong with this one.  

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2) The monthly IEA report has been released and is tilted a wee bit bearish on the combo of higher supply, lower demand expectations. The agency has revised down oil demand growth next year to +1.2 million barrels per day, due to slowing demand from China, while supply for last month is up by 600,000 bpd - driven by higher Russian and Kazakh output. 

Although OECD oil inventories fell for the first time since March, product stocks continue to tick higher, meaning the total remains above 3 billion at 3,092mn bbls, with both significantly adrift of their respective five-year ranges:

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3) China's biggest oil refiner suggests that fuel demand is up 5 percent in the first half of the year, considerably higher than the 0.4 percent derived from official data.

Demand is projected to be much higher than official estimates due to large quantities of blended gasoline not being accounted for, as it doesn't meet quality standards. Meanwhile, exports of 'officially produced' crude is being captured in the government data - further tempering demand expectations. 

While gasoline demand is projected to be higher this year, diesel is seen contracting for a third consecutive year. As the Chinese economy shifts towards being more consumer-driven, the share of gasoline in the country's fuel mix continues to grow - now up to 39 percent of the total. 

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4) Saudi Arabia is expected to slash capital spending this year by 71 percent, as it looks to shrink its budget deficit. Last year its deficit widened to 15 percent of its GDP, but by cutting its spending to 75.8 billion riyals (was 370 billion in 2014, wow...), its budget deficit is expected to narrow to 13.5 percent this year.

Economic growth is expected to shrink to just +0.6 percent this year, from 3.4 percent in 2015 - with possible contraction in some quarters. 

5) The folks at the IEA have been busy. Not only have they pushed out their monthly Oil Market Report today, but yesterday they issued their annual Energy Efficiency Market Report for 2016. 

The agency highlights that efficiency gains are being driven by government policy. It estimates that 30 percent of the world's energy consumption is now covered by mandatory standards and regulations, up from 11 percent in 2000. 

Global investment in energy efficiency grew by 6 percent last year to $221 billion. The chart below highlights that strict government policies are essential for energy efficiency improvements going forward. 

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6) The chart below helps to illustrate why Iraq were so upset with the result of the last meeting of OPEC members. They believe that secondary sources are underestimating their production by nearly 300,000 bpd. This is clutch given that OPEC members will likely be assigned quotas to adhere to at the November meeting; based off secondary sources, they will already be at a near-300,000 bpd disadvantage. 

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7) I was on CNBC Asia last night discussing how Saudi Arabia would have to do the heavy lifting for any OPEC production cut. The appearance was spun out into this article

About the Author

Matt Smith

deciphers and distills what is most relevant across the energy complex into cohesive and pithy knowledge you can use. The belly laugh is a bonus.

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