OPEC's April monthly report was released this morning and unveiled more of the same: expectations of rising global demand (which will soon be dented as global growth fizzles, impacting the need for commodities, especially in China and EMs), coupled with declining production by OPEC producers (really Venezuela whose oil output is collapsing as the insolvent, hyperinflating state grinds to a halt), even as shale producers continue to win market share from OPEC, but really mostly Saudi Arabia.
We start at the top, where OPEC optimism once again dominated, as the cartel sees a tighter market with rising demand even as its own output drops largely thanks to one nation:
- 2018 world oil demand estimate raised by 60k b/d, to 98.70m b/d, revised higher by 1.63mmbpd
- 2018 world oil demand y/y growth little changed at 1.63m b/d, or 1.7%
At the same time, March non-OPEC supply was seen 380kbpd higher M/M, with total non-OPEC supply averaging 66.2mln bpd. Most of this was Shale.
In total, world oil supply in March increased by 180k bpd to average 98.15mln bpd, an increase of 2.15mln bpd Y/Y.
And yet, at the same time, the OPEC-14 group crude output fell 201k b/d in March to 31.958m bpd, the lowest in one year.
While several nations saw their production decline in March, including Angola, Venezuela, Algeria and Saudi Arabia, it was and continues to be a Venezuela story. Amusingly, OPEC Sec Gen Barkindo steamrolled through the nuances, and claimed that OPEC production cut compliance had soared to 150% in March, when all he meant was that Venezuela production continues to plunge.
Barkindo also said that a longer-term alliance between OPEC/Non-OPEC to be discussed in June, and said he was Barkindo confident the supply cut deal will be extended beyond 2018, adding that he sees the oil market rebalancing in Q2/Q3 2018, whereas previously he saw it rebalancing by end-2018.
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Finally, the latest OPEC report had an interesting sidebar on China's new crude oil futures, which it wondered if it will become "a new regional crude benchmark." This is what it said:
On 26 March 2018, China launched its first crude futures contract as the country seeks to extend its influence over the pricing of oil sold into Asia. Over the past decade, China has emerged as a major force in the oil market, surpassing the US as the world’s biggest crude importer in 2017, taking in 8.5 mb/d.
The contract is made up of seven medium-sour crudes prevalent in the local market - six freely traded Middle East grades (Basrah light, Dubai, Masila, Oman, Qatar Marine and Upper Zakum) and China’s Shengli crude. Given that the seven grades of crude accepted for delivery in the INE are heavier and more sour than Brent and WTI, it could be a far more useful marker for China and other major regional importers.
Marking a successful start, more than 40 million paper barrels of oil were traded on the first day of China’s new crude oil futures contract. The new contract launched by the Shanghai International Energy Exchange (INE) attracted interest from retail and institutional investors, Chinese independent refiners, also known as teapots, and international traders. At one stage the volume of trades being done on the INE exceeded those of global rivals Brent and WTI. However, the daily volumes have thus far averaged around 25,000 contracts. The official goal behind the INE is to have a crude futures contract to help the price discovery process and assist enterprises in avoiding risks, while establishing a regional benchmark as an alternative to European Brent and Dubai Oman.
On the other hand, the extent to which the INE contract is independent from government interference is currently the main risk factor facing western investors, which is in addition to a currency risk, given that the INE is settled in yuan. Another issue is liquidity, given the limited number of potential buyers for physical delivery at the bonded storages in China. Nevertheless, the new contract is expected to be useful as a hedge for physical purchases, as well as for arbitrage plays, which could significantly boost DME Oman contract volumes.
Once established, China’s reference crude price could act as a regional benchmark for negotiations of spot or term crude oil prices, of which about 60% are supplied by OPEC Member Countries (Graph 1 - 6). At this level of imports from OPEC, Middle Eastern producing nations will be watching closely as they could, in time, face pressure from their Chinese buyers to adopt this benchmark for pricing their physical crude contracts.
Despite the upbeat start, the INE contract still has a long way to go to build up a history and reputation. Volumes and open interest will be the key measures of success and should be closely monitored going forward.