Deficits matter

Many economists and mathematicians will remind you that deficits matter. Though I am not talking about budget deficits or trade deficits right now, but the global oil market supply and demand deficit. Oil traders are speculating whether or not opposition from Iran and Venezuela will derail a production increase from Russia and Saudi Arabia (it won’t). The reality is it may slow the increase, but really the planned increase of 1 million barrels a day will barely offset plunging output from Venezuelan and the impact from the U.S. sanctions on Iran. Yet, as OPEC reports today that Saudi Arabia oil saw its demand drop month over month by the biggest ever recorded, it is rising questions as to whether this historic demand drop is due to issues like refinery maintenance or a sign that global oil demand is slowing.

We believe it is a one off. In fact, Reuters reported that Saudi Arabia has informed five Asian refiners that it will supply full contractual volumes of crude oil in July, five sources with knowledge of the matter said on Tuesday. The world’s top crude exporter has also reinstated contracted volumes of Arab heavy crude to one buyer after cutting supplies in the previous month, one of the sources said. So, the demand for Saudi oil will bounce back very shortly.

OPEC did not change its outlook for global oil demand, keeping expectations near a record high. They project world oil demand growth in 2017 to 1.65 million barrels per day (mb/d), putting global demand at a record 97.20 mb/d.

In 2018, OPEC projections of oil demand growth was also kept unchanged despite some offsetting revisions in both OECD and non-OECD. Global oil demand is now estimated at 1.65 mb/d y-o-y to record average 98.85 mb/d.

OECD consumption is forecast to grow by 0.40 mb/d in 2018, some 0.02 mb/d higher than in the previous report, following positive revisions in OECD Americas. Meanwhile, oil demand in the non-OECD is now projected to grow by 1.27 mb/d, showing a downward revision of 0.02 mb/d from last month’s assessment. While China’s and other Asia’s oil demand was revised up, this was more than offset by downward revisions in Latin America and the Middle East.

World Oil Supply Non-OPEC supply growth in 2017 stands at 0.88 mb/d y-o-y, revised up marginally by 0.01 mb/d from last month’s assessment due to rounding. For 2018, total non-OPEC supply was revised up by 0.13 mb/d, to 59.75 mb/d, representing y-o-y growth of 1.86 mb/d. Upward revisions were made for 1Q18 in the OECD, particularly the U.S. and Canada, and in the forecast of 2Q18 in the OECD, FSU and China, due to higher-than-expected output. However, these upward revisions were offset by downward revisions the same quarters.

Looking at these numbers, the global supply versus demand curve is the thinnest it has been in a year leaving us without much margin for error. If OPEC fails to raise output or if U.S. shale fails to keep its meteoric pace of production increases, then we will see a market that is woefully undersupplied.

 OPEC says that In 2017, demand for OPEC crude is estimated to stand at 33.1 mb/d, which is 0.7 mb/d higher than a year earlier. In 2018, demand for OPEC crude is forecast at 32.7 mb/d, a decline of 0.3 mb/d from the previous year’s level. I think they are underselling it personally.

Saudi Arabia and Russia are already raising output leaving global spare production capacity very tight. Get hedged for the next oil and product price spike.

Fed meeting, dot plots and North Korea. All of these things can move our markets this week now more than ever. You need to stay tuned to the Fox Business Network to keep up with what is moving our world.

About the Author

Senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor.