OPEC Compliance Falls In June But IEA Revises Global Oil Demand Higher

Summary

• IEA revised global oil demand growth higher to 1.41 million b/d.
• OPEC compliance ratio fell month over month.
• OECD inventories continue to decline as expected.

Welcome to the IEA edition of Oil Markets Daily!

The closely watched IEA oil market report for July is out today with some notable things to cover.

Demand Moves Higher

IEA revised 2017 global oil demand growth higher to 97.96 million b/d with year-over-year growth of 1.41 million b/d. This is a sizable increase from last month's data of 1.28 million b/d.

In Seeking Alpha's Energy Week interview, we said:

For oil, we follow “the other guys” that make up almost half the world’s global oil supply. This is the area everyone is neglecting, but it could be the reason why oil prices boom in the next cycle. In addition, we follow emerging market trade flows, because it has a high correlation to predicting global oil demand growth.

In our premium reports published to HFI Research subscribers, we said that emerging market flows are on track to show oil demand growth of 1.5 million b/d this year with the bulk of the increase coming in the second half of 2017.

Although IEA has noticed the uptick in demand, we think its growth forecast of 1.41 million b/d remains too low and will likely see another upward revision over the summer.

OPEC Production Rose Month Over Month

In IEA's report, OPEC production rose 340k b/d month over month. The increase includes Equatorial Guinea, which is around 200k b/d.

For the 12 countries covered under the OPEC production cut agreement, compliance rate fell from 95% to 78%. The increase came from Saudi, which saw its oil production rise 130k b/d month over month as its own domestic demand starts to pick up.

Angolan output also recovered by about 60k b/d, and Iraq increased production by 20k b/d and is currently the worst offender under the OPEC agreement with a compliance ratio of 29%.

Outside of the 12 countries, Libya's oil production rose by 80k b/d month over month to 820k b/d, and Nigeria's production increased by 60k b/d to 1.59 million b/d.

Inventories Decline

IEA estimates that OECD inventories fell 6.8 million bbls in June with the five-year average overhang falling to sub 260 million bbls. This puts the OECD crude storage overhang to the lowest level since February 2015.

For May, IEA notes that OECD total oil stockpile dropped 6 million bbls to 3,047 million bbls. The overhang to the five-year average fell from over 300 million bbls to 266 million bbls.

Concluding Thoughts

Global oil stockpile continues to decrease, but the pace of the decrease was a bit slower than our preliminary forecasts at the start of 2017 had forecasted. A large part of the reason for the slower decline is due to a transfer of crude storage from OPEC to OECD in January and February, which resulted in 60 million bbls of unexpected storage increase.

Going forward, with global demand remaining strong, we see storage declines accelerating in the second-half of 2017. In OPEC's July meeting, the market is looking for answers from Saudi as whether it will decrease production by another 500k b/d to take into account the recent surge from Libya and Nigeria. We will be writing an exclusive piece on this for HFI Research subs, so if you are interested, you can sign up here.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.