Oil Market Report - July 2019

Oil Market Report

Re-balancing Slows Down

In the first half of 2019, oil supply exceeded demand by 0.9 million barrels per day (mb/d). This resulted in a global surplus of 0.5 mb/d in the second quarter of 2019, contrary to earlier expectations of a deficit. This surplus adds to the significant stock builds observed in the second half of 2018 when production surged while demand growth slowed. Currently, the market is oversupplied, and any rebalancing is expected to occur in the distant future.

The widely anticipated decision by OPEC+ ministers to extend their output agreement to March 2020 provides guidance but does not alter the fundamental outlook of an oversupplied market. Assuming constant OPEC output at the current level of around 30 mb/d, stocks could increase by a net 136 million barrels by the end of the first quarter of 2020. The call on OPEC crude could fall to only 28 mb/d, presenting a significant challenge to those managing the market.

Demand

While the GDP estimates behind the forecast remain unchanged from last month's report, there are signs of deteriorating trade and manufacturing activity. Global manufacturing output fell for the first time since late 2012 in the second quarter of 2019, and new orders have declined rapidly. However, the mood surrounding the U.S./China trade dispute has improved, and resolving outstanding issues would significantly boost economic confidence.

The outlook for oil demand growth in 2019 remains at 1.2 mb/d. For 2020, the pace of growth is expected to average 1.4 mb/d, up from 1.2 mb/d this year. Despite this, many factors have led to a downgrade in the estimate for global oil demand growth in the second quarter of 2019 by 0.45 mb/d. These include sluggish European demand, a slowdown in LPG deliveries and weakness in the aviation sector in India, and lower demand for both gasoline and diesel in the U.S. in the first half of 2019.

Unless the economic backdrop and trade disputes worsen, global growth is expected to be higher in the second half of 2019. Supportive factors include lower oil prices, which are about 8% below last year's levels, and reduced geopolitical tensions in the Middle East Gulf, although shipping costs have risen due to security concerns.

Overall, the key takeaway is the continued oversupply in the oil market, driven by robust non-OPEC supply growth, particularly from the U.S., and the need for OPEC to manage this surplus.