Oil & Gas
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September 2017
Brent oil prices remained in a narrow range between US$50-53 per barrel during August, recovering from an average price of US$48.5/bbl in July. Bullish sentiment returned to markets after unexpectedly large declines in US crude stockpiles.

The US Energy Information Administration (EIA) released data showing commercial US crude stocks have fallen by almost 13% from their peak in March 2017 to 466.5 million barrels (Figure 1). Stocks are now lower than in 2016. The decline was driven by a high level of US refinery crude consumption amounting to almost 17.3Mbpd in August, averaging 94% utilisation rate of crude processing capacity. This was around 600kbpd higher than for the same month in 2016.

International trade was also responsible for the declines in inventories, chiefly from the reductions in Saudi Arabian crude imports to the US. Riyadh has focused on reducing crude flows to the US, because US data is the most transparent and has greater effect on market sentiment. OPEC's main goal is to draw down OECD inventories, of which the US accounts for ~45% of the total. We also expect the cartel’s oil supply to fall by 419kbpd during August mostly driven by reduction in Saudi Arabian output.

The US is exporting nearly 6Mbpd of crude oil and oil products. US exports of middle distillates –mostly diesel– reached a record 1.6Mbpd in July and remained high during August. The US also exports nearly 1Mbpd each of crude oil, gasoline, and LPG. Exports of lighter shale oil from the Gulf Coast ports are expanding because of the favourable WTI-Brent spread and low freight costs, US crude has started to be shipped to distant refineries. The higher demand for US oil products is a result of refining problems in Mexico and Venezuela and this has led to higher imports of finished products.

On the demand side, while the latest data out of China was somewhat weak this month – disappointing industrial production and refinery runs at a ten-month low – the global consumption figures are looking robust. According to the Indian oil ministry's Petroleum Planning and Analysis Cell, Indian oil demand was up 1.1% year-on-year in July, driven by an 8.5% increase in diesel consumption, and an increase of 11.7% from gasoline. LPG demand was up 12.5, while pet-coke and naphtha both decreased by 10% and 27% respectively.

Despite OPEC efforts to curb production, US shale gas resilience is the key variable behind our forecast of strong global oil supply during 2H 2017, this is likely to keep a lid on prices. The increasing number of drilled-but-uncompleted wells in the US suggests shale gas production will likely find support even though the number of rigs drilling for oil stabilized during August, after a full year of steady fleet growth (Figure 2). Over the longer term the extended period of lower prices continues to raise concerns over sluggish upstream investment. According to the International Energy Agency, upstream investment is likely to increase only 3% in 2017, after a decrease of 44% from 2014 to 2016. Investment in US shale gas is projected to surge by 53% and will be the main driver of upstream investment growth. Russia (6%) and the Middle East (4%) are other leading regions.