It has been obvious for a month now that the sentiment on the physical market has considerably deteriorated. Not only have outright prices retreated but structures have weakened, the European crude oil benchmark is now printing below its forward peer whilst it commanded a premium of more than $2/bbl mid-April. Worse yet, crack spreads are under pressure, an unmistakable sign that refiners do not see the need to churn out products due to lax consumer/industrial demand. One of the factors that has somehow kept hopes alive was the impending cuts in the cost of borrowing costs, which might sow the seeds of flourishing aggregate demand.

Whether these hopes were partly dashed yesterday is far from clear. It would be convenient to put the blame for the oil price sell-off on the worse-than-expected April US PPI number, which came out higher than expected compared to March but matched expectations on a year-on-year basis. Bets of a September Fed action have been scaled back but curiously, equities strengthened, the dollar weakened, and bond yields dropped also ignoring a trove of import tariffs the Biden administration imposed on Chinese goods.

The ongoing assault on Rafah by the Israeli army and the wildfire in the close proximity of a Canadian oil sand producing region in Alberta also failed to embolden those with bullish propensity although possibly limited the downside. Instead, focus shifted to the RBOB contract, which led the way south with a drop of more than $2/bbl equivalent, possibly due to expectations of a sizeable build in gasoline inventories. Well, the API disagreed. Both crude and gasoline stockpiles thinned whilst distillate inventories were up a little. It looks as though that relief will only be provided by a convincing strengthening of crack spreads although a disappointingly large increase in the US consumer price index due out this afternoon will unequivocally further sour the currently bitter mood.
 

Undeterred Optimism

The most salient change in the updated OPEC view on global oil balance was in the methodology. In the April issue of its Monthly Oil Market Report OPEC introduced the term DoC, referring to the group of OPEC+ producers with or without output ceilings that participate in the Declaration of Cooperation. It published figures both for non-OPEC and non-DoC supply and also for calls for OPEC and DoC oil. From the May edition onwards, in an unambiguous demonstration of unity, total supply will be the sum of DoC and non-DoC supply and consequently its call will refer to the demand for oil from DoC countries. The EIA does not publish DoC supply data, but it could be pieced together, the IEA does, so we will amend our calculations and tables accordingly today. From next month we intend to bring all three forecasts to the same ie. DoC, basis. Notwithstanding these modifications, the end result, the projected global stock change and absolute OECD stock levels will remain unaffected. The difference between DoC supply and DoC call will be the same as between OPEC supply and OPEC call.

The organization stands resolutely upbeat on global consumption for the balance of this year and even for 2025. It left its economic growth forecasts unchanged for both 2024 and 2025 at 2.8% and 2.9% respectively. It acknowledges that downside risk persists, possibly due to geopolitical tension and inflationary pressure, nonetheless, it sticks to the recent narrative and suggests that ‘the continued momentum observed since the start of the year could create additional upside potential for global economic growth in 2024 and beyond’. This assumption originates from expectation in the lowering of borrowing costs in the US, the Eurozone, and the UK together with auspicious economic prospects in Asia, notably in China and India.

When the economic outlook is buoyant then so is the perspective for global oil demand. Absolute figures and growth estimates are unaltered from April. Consumption will increase by 2.25 mbpd this year and reach 104.45 mbpd. It will add another 1.87 mbpd in 2025 advancing to 106.33 mbpd for the entire year and peaking at a rather astounding 107.40 mbpd in 4Q 2025. The bulk of the demand growth will come from the non-OECD part of the world; 1.90 mbpd in 2024, 1 mbpd of which is China and India combined and 1.80 mbpd next year, 600,000 bpd of which is from the two Asian economic juggernauts.

Non-DoC supply estimates have not been altered significantly either. It will stand at 52.95 mbpd in 2024 and rise to 54.08 mbpd in 2025. Non-DoC supply will increase by 1.25 mbpd this year and 1.12 mbpd next. The Americas will be responsible for more than 50% of the total non-DoC supply and growth. It is conspicuous that the annual increase in non-DoC supply considerably lags the growth in worldwide demand. Therefore, according to OPEC, the call for the oil supplied by OPEC+ will rise by 900,000 bpd to 43.20 mbpd this year and by another 780,000 bpd to 43.98 mbpd in 2025.

These numbers will only gain meaning when set against potential DoC production. In the first quarter of the current year the group pumped 41.18 mbpd collectively, including those not bound by quotas – 26.54 mbpd from OPEC and 14.64 mbpd from the rest. Given that the call stood at 42.80 mbpd global oil inventories sank at the pace of 1.6 mbpd. For the balance of 2024 the quarterly calls are 42.70 mbpd 2Q, 43.70 mbpd 3Q and 43.60 mbpd 4Q. Assuming an implausible improvement of 500,000 in combined supply, oil inventories would decline by 1 mbpd/2 mbpd/1.9 mbpd respectively. When one extrapolates these figures to OECD stocks, she will see that by the year-end inventories in the developed part of the world will have declined to 2.613 mbpd. Adding another 200,000 bpd of production for 2025 one would still find an average global stock decline of more than 2 mbpd resulting in OECD stocks plunging to 2.309 billion bbls. These are awfully bullish predictions, in fact so sanguine that the market is simply reluctant to buy into it, at least this is what the recent price drop insinuates. For this reason and as we are intending to detail it in Friday’s note, no change in production targets is anticipated in the June ministerial meeting but when the 2025 baselines/quotas are discussed, possibly after June, anxiety level in the conference room could elevate significantly.

© 2024 PVM Oil Associates Ltd