Global oil inventories shrinking on robust demand: IEA
The US has recently seen two severe weather events: Hurricane Harvey has more directly affected oil industry operations than Hurricane Irma, although the full impact of the latter remains to be seen at the time of writing. As far as Harvey is concerned, disruption to local oil markets in the US Gulf Coast is easing on a daily basis and its impact on global markets is likely to be relatively short-lived. Given the severity of the storm, it was inevitable that the normal output and distribution of products would be hampered, that local shortages would emerge, and prices would rise. Before the storm hit Texas, commercial stocks in the US and in the Gulf Coast region were at comfortable levels. This was a good thing because the estimated loss of refinery output in September of about 1.6 mb/d has only partially been offset by lower demand. Loans to refiners from the US Strategic Petroleum Reserve as well as the availability of surplus European gasoline ensured that the Gulf Coast and areas of the US dependent on it were well covered, as was Mexico. In addition to the adaptations made by the market, the IEA was ready to act through its collective response mechanism if the situation had worsened, although that did not turn out to be necessary. However, the availability of global strategic stocks proved their value, even at a time of strong oil market liquidity.
While the industry responded much better than a decade ago when severe storms hit the Gulf Coast, the region nowadays is more important to the global oil market. For a long time it has been a production and refining hub; today it is an important global trading centre with more than 4 mb/d of products and 0.8 mb/d of crude oil being exported. For products, US exports are important for many countries e.g. Mexico, Venezuela and several Central American states. Crude oil from the US finds its way to an increasing number of countries including China, Korea, Italy, the Netherlands, Singapore and the United Kingdom. With US export volumes expected to increase, the strategic importance of the Gulf Coast will only grow. The rise of the Gulf Coast as a major energy hub means that, in some respects, it can be compared to the Strait of Hormuz in that normal operations are too important to fail.
In the sections of this Report, we assess the impact of Hurricane Harvey, but, as always, there are other market developments that affect our forecast. Demand growth is strengthening: robust demand in OECD countries was a key factor in 2Q17’s global growth of 2.3 mb/d, the highest quarterly year-on-year increase since mid-2015. Consequently, our estimated demand growth for 2017 has been increased to 1.6 mb/d. On the supply side, global production fell in August for the first time since April, with lower output from OPEC countries being one factor but also, following a fall in month-on-month production in June, US crude production has been affected by Harvey from a lower base than we anticipated. As for stocks, OECD levels were unchanged in July versus June, when the normal trend is for an increase. Within the OECD total, product stocks are now only 35 mb above the five-year average. Depending on the pace of recovery for the US refining industry post-Harvey, very soon OECD product stocks could fall to, or even below, the five-year level. Oil prices have recently settled down after the disturbance brought by Hurricane Harvey and, indeed, Brent crude values have increased to levels last seen in early April and the market is now in backwardation, albeit a shallow one. Based on recent bets made by investors, expectations are that markets are tightening and that prices will rise, albeit very modestly.
The oil market has coped relatively well with the challenges posed by the hurricane season thus far, but that said, now may be a good time to consider steps to mitigate the impact of future severe-weather events. This could encompass reviewing the robustness of the Gulf Coast energy infrastructure, including production facilities, refineries, crude and product storage capacity, pipelines and marine infrastructure, and what measures can be taken to minimize disruptions to port operations. There is also an opportunity to examine whether more can be done by industry and government working together to strengthen energy security, perhaps including the provision of government-held product stocks in the US, a subject that was last examined in 2015’s Quadrennial Energy Review. The IEA remains committed to strengthening energy security in all parts of the value chain and we will work with our member governments and others to achieve this objective.