Middle East oil demand growth in 2019 may be challenged by various factors, mainly related to major economic transformation programmes, subsidy reduction policies and continuing geopolitical issues in some countries, according to OPEC Monthly Oil Market Report-December 2018

WORLD OIL SUPPLY

Non-OPEC oil supply growth in 2018 was revised up by 0.19 mb/d from the previous MOMR, and is now estimated to grow by 2.50 mb/d to average 60.03 mb/d, mainly due to upward revisions in historical US and Canada production data, as well as a higher supply forecast for 4Q18 by 0.50 mb/d mainly for Russia. The expected y-o-y growth of 2.13 mb/d in the US with higher production from Canada, Russia, Kazakhstan, the UK and Ghana will support non-OPEC oil supply growth in 2018, while Mexico, Norway and Vietnam will show the largest declines.

Non-OPEC oil supply growth in 2019 revised down by 0.08 mb/d to average 2.16 mb/d, due to a mandatory production adjustment in Alberta, and Russia, as a result of the new decision made at the fifth Meeting of the OPEC and Non-OPEC Ministerial Conference in December. Absolute supply is now forecast to reach an average of 62.19 mb/d. The US, Brazil, Russia and the UK are the main drivers for next year’s growth also supported by Canada, Ghana, Australia and Kazakhstan, while Mexico, Norway, Indonesia, Vietnam and Egypt are projected to see the largest declines. The 2019 non-OPEC supply forecast is faced with many challenges, including changes in the intensity of drilling and completion in the US shale industry, bottlenecks in the transportation of oil in the Permian Basin, Western Canada and even in the Williston Basin in North Dakota, as well as the realization of final investment decisions (FIDs) regarding projects in other non-OPEC countries.

OPEC NGLs are expected to grow by 0.10 mb/d, revised down by 0.02 mb/d in 2018 compared with the previous estimate, to average 6.34 mb/d, and are forecast to grow by 0.11 mb/d in 2019 to average 6.45 mb/d. In November, OPEC crude oil production decreased by 11 tb/d to average 32.97 mb/d, according to secondary sources.

Non-OPEC supply preliminary data in November, including OPEC NGLs, rose by 0.44 mb/d m-o-m to average 67.67 mb/d, higher by 2.88 mb/d y-o-y. As a result, preliminary data indicates that global oil supply increased in November by 0.50 mb/d m-o-m to average 100.64 mb/d.

THE OIL FUTURES MARKET

Crude oil futures prices dropped sharply over November reaching their lowest level in more than a year, after prices peaked in October hitting a four-year high. Oil prices continued to fall since early October and witnessed eight consecutive weekly declines, to reach their lowest level since October 2017. Oil prices continued to decline amid weaker market fundamentals as the market focused on global oil supply, which rose faster than expected, particularly from the US. Also, several other producers signalled that output would grow quicker than expected in 2019. Slowing global economic momentum amid US-China trade tensions, weaker equity markets as well as concerns over oil demand growth added further pressure on oil prices. Oil prices extended losses in November following massive selloffs from hedge funds and other money managers, which reduced their net long positions to their lowest level in more than a year.

Furthermore, crude oil prices dropped further as US crude oil inventories continued to rise for ten consecutive weeks, to the week of 23 November, adding more than 56 mb, and reached their highest level since Novembern2017, despite increasing refineries production output and high US crude oil export levels.

In November, ICE Brent was on average $14.68, or 18.2%, m-o-m lower at $65.95/b, while NYMEX WTI fell m-o-m by $14.06, or 19.9%, to average $56.69/b. Y-t-d, ICE Brent is $18.92, or 35.1%, higher at $72.87/b, while NYMEX WTI increased by $16.03, or 31.9%, to $66.27/b. DME Oman crude oil futures also declined m-o-m by $14.41 in November, or 18.0%, over the previous month, to settle at $65.63/b. Y-t-d, DME Oman was up by $18.46, or 35.1%, at $70.99/b. On 11 December, ICE Brent stood at $60.20/b and NYMEX WTI at $51.65/b.

MIDDLE EAST

SAUDI ARABIA

In the Middle East, oil demand continued to decline in Saudi Arabia, recording a drop in October. Oil demand declined by around 0.19 mb/d as compared to the same period in 2017, which equates to more than 8% y-o-y. In cumulative terms, data up to October suggest a decline of around 0.17 tb/d as compared to the same time last year, however, this indicates a steeper drop from the levels recorded last year during the same period when oil demand dipped by around 40 tb/d y-o-y. Direct crude burning has been one of the primary factors behind the general waning consumption as demand dropped by 75 tb/d, or 16%, y-o-y in October. Substitution policies remain a major factor in lower requirements for direct crude for the purpose of burning and to some extent diesel oil. This is part of the government’s plans to move away from using oil and petroleum products in the power generation sector. Diesel also weakened, declining by 53 tb/d, or more than 9%, y-o-y due to less-than-expected consumption in the construction and transportation sectors. Transportation fuels also declined with both gasoline and jet fuel weakening during the month of October.

In October gasoline dropped by around 7% y-o-y and jet fuel by around 40% y-o-y. On the other hand, fuel oil increased by 37 mb/d, or around 7%, y-o-y in line with higher power generation requirements.

Iraq

In Iraq, October 2018 oil demand growth remained positive for the fourth consecutive month with data indicating a solid rise of around 0.14 mb/d from the levels seen in October 2017. Total product demand is now around 0.73 mb/d. Fuel oil led the gains with growth above 0.1 mb/d y-o-y supported by strong power generation demand.

For the rest of 2018 and 2019, Middle East oil demand growth may be challenged by various factors, mainly related to major economic transformation programmes, subsidy reduction policies and continuing geopolitical issues in some countries. Oil demand is, nevertheless, expected to grow in Saudi Arabia, I.R. Iran, UAE, Kuwait, Qatar and Jordan with transportation fuels, especially gasoline, and industrial fuels, particularly diesel and residual fuel oil, playing significant parts in the overall oil demand growth for another year. Oil demand growth in the region is projected to decline during the current year by 60 tb/d, while projections for 2019 indicate growth of around 60 tb/d.