Oil Market Report

Crude oil prices sharply declined in July and early August, driven by an oversupply and a strong U.S. dollar. By early August, global benchmarks had dropped nearly 25% from late June levels, with ICE Brent trading at approximately $49 per barrel and NYMEX WTI at $43.30 per barrel.

Global oil demand in 2015 is projected to grow by 1.6 million barrels per day (mb/d), an increase of 0.2 mb/d from earlier estimates, marking the fastest growth in five years. Economic recovery and lower fuel prices have contributed to this rise, with demand expected to maintain above-trend growth of 1.4 mb/d in 2016. Meanwhile, world oil supply declined by 0.6 mb/d in July, primarily due to lower non-OPEC output, while OPEC production remained near a three-year high. As low prices and investment cuts take effect, non-OPEC supply growth is forecasted to slow significantly, dropping from 2.4 mb/d in 2014 to 1.1 mb/d in 2015, with an expected contraction of 200,000 barrels per day in 2016.

OPEC Output and Inventory Surpluses

OPEC crude production slightly decreased in July to 31.79 mb/d, as Saudi Arabia reduced output while Iraq and Iran increased production. Due to stronger demand and weakening non-OPEC supply growth, the expected demand for OPEC crude will rise to 30.8 mb/d in 2016.

In June, OECD crude inventories rose counter-seasonally by 9.9 mb, reaching a record high of 2,916 mb. The surplus relative to the five-year average widened to 210 MB. Seasonal restocking of refined products increased inventories, covering 31.3 days of forward demand—0.2 days higher than at the end of May.

Refinery runs hit a record high of 80.6 mb/d in July, 3.2 mb/d above the previous year. However, cracks are beginning to appear in the refining market. In Asia, high distillate stocks have driven margins in Singapore to their lowest levels since 2009, forcing refineries to cut runs. Conversely, the U.S. refining sector remains strong, with gasoline cracks at high levels supporting robust refining margins and throughput.

Long Road to Market Rebalancing

Oil market players are adjusting to a prolonged period of lower prices. Despite growing demand and slowing supply, a persistent surplus remains. Oil consumption is expected to rise by 1.6 mb/d in 2015, marking the most substantial annual increase in five years – double the 0.7 mb/d growth recorded in 2014.

On the supply side, global production continues to outpace demand, increasing by 2.7 mb/d yearly. OPEC producers, particularly Saudi Arabia and Iraq, have kept production high, pushing the group's total output to 31.8 mb/d – the highest in three years. Since OPEC's strategic shift in late 2014 to defend market share over price, the group has collectively increased output by 1.4 mb/d.

While OPEC accounts for a significant portion of the global supply increase, non-OPEC production remains strong. Despite slowing growth, non-OPEC supply in July was still 1.2 mb/d higher than a year earlier, supported by previous investments in production. However, oil’s renewed drop below $50 per barrel has forced major producers to reassess their investment plans, leading to widespread budget cuts. While efficiency improvements and cost reductions may offset some of these cuts, production declines are anticipated, with U.S. output expected to be the most brutal hit.

Supply Surplus and Storage Constraints

Even as non-OPEC production slows and demand grows, the market remains oversupplied. In Q2 2015, the surplus peaked at 3.0 mb/d – the highest since 1998. While the excess is expected to decline, the oversupply will likely persist into the first half of 2016. If OPEC maintains its recent production average of 31.7 mb/d, the second half of 2015 could see supply exceeding demand by 1.4 mb/d, pushing storage limits to their capacity. The surplus is projected to narrow to 850,000 barrels per day in 2016, with Q4 potentially marking the first stock draw in years. However, this estimate does not include potential increases in Iranian output should sanctions be lifted.

Looking Ahead: How Low, and for How Long?

With the current supply glut, industry players have embraced the notion of "lower for longer." However, the key question remains – how low, and for how long? While reduced investment will eventually rebalance the market, it will also limit future supply growth. If demand continues at above-trend levels, as in 2015, the oil market could rapidly shift in dynamics, with the potential for price fluctuations beyond current expectations.