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KUWAIT: A number of developments kept the oil market on its heels during August-16 that included a 2.1 million increase in US crude oil inventory during the week ending 5-Aug-16, according to the API. Rig count also saw the biggest jump in 2016 and rose for the seventh straight week. On the other hand, the EIA raised the production forecast for US oil producers indicating a slower than expected decline in US oil output as US oil producers are proving more resilient to oil prices. The agency also lowered the average US oil price forecast for 2016 to $41.16/b from $43.57/b and for 2017 to $51.58/b from $52.15/b. A similar forecast was made by IEA that lowered global demand outlook for 2017 by 0.1 mb/d due to the expected macroeconomic factors.

Oil Prices

Oil supply concerns continued during July-16 led by developments on rising crude inventories in the US and across the globe, including China, as well as rising oil production or resilient oil production in the US. Moreover, there is a looming concern that as the seasonal maintenance kicks in the US, oil demand will further decline leading to further pressure on oil prices. The latest API report highlighted the biggest crude inventory in over the past three months with an increase of 2.1 million barrels.

The EIA's short term energy outlook also pointed to figures not supportive of oil prices while highlighting July-16 production of 8.57 mb/d, a decline of 180 tb/d and the lowest level since April-14. In the report, the EIA raised the production forecast for US oil producers indicating a slower than expected decline in US oil output as US oil producers are proving more resilient to oil prices. The agency raised US oil production forecast to average at 8.73 mb/d in 2016, up from its previous forecast of 8.61 mb/d as it expects higher output with the expected increase in drilling later during this year. Its 2017, US oil production forecast was also raised from 8.2 mb/d to 8.31 mb/d.

The agency also lowered the average US oil price forecast for 2016 to $41.16/b from $43.57/b and for 2017 to $51.58/b from $52.15/b. In terms of rig count, Baker Hughes reported that US oil rig count saw the biggest jump in 2016 as producers reacted to the temporary rise in oil price in June-16. This was also the seventh consecutive week when the company has reported increase in rig count. Oil fields services company Halliburton also indicated that the north American market has turned around and the company expects a rise in rig count during the second half of the year.

In a positive development, spare production capacity globally appears to be at negligible levels, according to US DoE, indicating that the oil prices may react violently to supply shocks like the ones seen recently. Moreover, oil majors are reducing spending as they face issues with funding and refining margins, which reached the lowest since 2010 in the case of BP in Q2-16.

Average OPEC monthly oil price declined for the first time in over six months during July-16 to $42.68/b, a 6.9 percent decline as compared to the previous month. Brent and Kuwait Crude also declined at a similar pace during the month.

World oil demand

Total world oil demand growth for 2016 was increased by 30 tb/d from the last month to 1.22 mb/d and is now expected to reach 94.26 mb/d. The increase comes primarily on the back of higher-than-expected oil demand from OECD Europe and Other Asia during the first two quarters of the years. Road transportation sector continues to drive oil demand in Europe further supported by the industrial sector, although petrochemical feedstocks like naphtha saw a decline. Auto sales in Europe continues to be positive with 7 percent increase in registrations, according to ACEA. On the negative side, the OPEC monthly report also pointed to the negative impact of Brexit on oil demand for the remainder of the year as well as next year. In the Other Asia region, oil demand continues to be driven by India further supported by higher demand in Thailand. Monthly oil consumption in the US continued to rise since February-16 on the back of rising gasoline jet/kerosene and fuel oil requirements partly offset by decline in diesel oil demand. Nevertheless, according to the full month data available for May-16, the increase in demand was lower than the previous months. Preliminary weekly data for the next two months, ie June-16 and July-16 also pointed to 4 percent and 1.7 percent increase in demand.

World oil demand growth for 2017 was kept unchanged and is expected to grow by 1.15mb/d to a new record oil consumption of 95.41 mb/d. The US will continue to remain one of the major contributors to demand growth for the OECD countries with an expected increase of 0.15 mb/d. In addition, both Mexico and Canada are expected to post increase in oil demand. In OECD Asia Pacific, oil demand from Japan is expected to slide as a number of nuclear plants are expected to restart operations, which will be partially offset by higher demand in South Korea. The other Asia region will continue to be a major contributor to this growth in 2017 on the back of positive economic growth in addition to steady retail prices. In terms of individual contribution, India is expected to be the biggest contributor to growth, whereas Indonesia, Thailand, Singapore and the Philippines are also expected to contribute positively to oil demand growth in 2017.

World oil supply

Non-OPEC oil supply growth in 2016 also saw an upward revision of 90 tb/d in the latest OPEC report on account of higher-than-expected production in the US and UK during 2Q-16. Non-OPEC oil supply growth is now expected to contract by 0.79 mb/d in 2016 to average at 56.13 mb/d. The report also warned that although global liquids supply declined in Q2-16 by 1.06 mb/d q-o-q or 0.30 mb/d y-o-y to average 94.6 mb/d, some of the non-OPEC supply outages seen during the second quarter (that helped the recent oil price rally) is expected to come back online during the second half of the year. The outages include the Canadian wildfires that affected oil production in the country. In addition, US rig count and the end of seasonal maintenance will also support output. Meanwhile, non-OPEC supply growth in 2017 was lowered by 40 tb/d and is now expected to contract by 0.15 mb/d to average at 55.97 mb/d. The decline comes on the back of 2016 revision as well as a change in production expectation for the UK. Moreover, OPEC continues to expect that although the decline in upstream investment by international oil companies has shown lesser-than-expected impact, the lack of usual exploration activities for new discoveries and replacing old fields will result in an acceleration of production declines in the coming years.

Non-OPEC oil supply growth for 2017 was lowered by 40 tb/d as compared to the previous expectations and is now expected to contract by 0.15 mb/d to average 55.97 mb/d. The new estimates primarily reflect the revisions made to 2016 actuals and forecasts and also partially due to a change in the UK's production forecast for 2017.

OPEC oil production & spare capacity

OPEC oil production remained elevated during July-16 but declined slightly by 0.3 percent to 33.2 mb/d, according to Bloomberg. There were minimal changes in production by individual countries. Most notable was the decline of 70 tb/d in Nigeria as the country struggles to overcome the issues in the Niger Delta region. According to Nigerian National Petroleum Corporation (NNPC), the country's production is down by almost 700 tb/d from a regular output capacity of 2.2 mb/d when in fact the government had expected to increase the production to pre-January levels by August-16.

On the other hand, Iran, Iraq, UAE and Venezuela recorded an output increase of 50 tb/d during the month. According to Bloomberg, Saudi Arabia continued to produce at record levels during July-16. However, we believe, that a majority of the increase in production was primarily aimed at domestic consumption in order to deal with the seasonal summer demand where electricity consumption is at its peak in the region and hence the higher production must have had a minimal impact on international crude supply. Meanwhile Iran continues to ramp up production although further increase in production would require an investment pegged at $100 billion. A news agency that cited Iran's oil minister, said that the country's oil output has reached 3.85mb/d and is expected to reach 4.6 mb/d over the next five years.

Another weekly said that Iran is expected to sign oil contracts worth $25 billion within two years. Furthermore, in a continued sign of the impact of low oil prices on gulf oil exporters, Abu Dhabi has delayed an estimated $1 Bn oil and gas development project, according to Platts. The deadline to submit the technical bids for the said project was in the last week of July, but it was pushed back, essentially putting the project on hold. Venezuela, on the other hand, continues to struggle to ramp up production due to the political and economic crisis in the country. The country's oil output is the lowest in about four decades and this has prompted the government to push for an OPEC meet to check OPEC output.