IEA Cuts non-OPEC Oil Supply Outlook for 2015 (USO) (OIL)

• The price of oil continued to collapse into January as rising supplies collided with weak demand growth and OPEC maintained its commitment to not cut production. Brent crude futures last traded at $48.40/bbl, near a six-year low. NYMEX WTI was at $47.75/bbl.
• Macroeconomic weakness continues to restrain global oil demand growth, with 4Q14 deliveries estimated just 0.6 mb/d above year-earlier levels. Despite lower prices, demand growth is only forecast to accelerate to 0.9 mb/d in 2015, unchanged since last month's Report.
• The oil selloff has cut expectations of 2015 non-OPEC supply growth by 350 kb/d since last month, to 950 kb/d. Effects on North American supply are so far limited to 95 kb/d and 80 kb/d to the Canadian and US forecasts, respectively. Projections for Colombia are cut by 175 kb/d and a further 30 kb/d for Russia.
• OPEC output rose by 80 kb/d in December to 30.48 mb/d, as Iraqi supply surged to 35-year highs, offsetting deeper losses in Libya. Downward revisions to the non-OPEC supply outlook raise the 'call' on OPEC for 2H15 to an average 29.8 mb/d - just shy of OPEC's official target of 30 mb/d.
• Global refinery crude throughputs surged to a new record high of 78.9 mb/d in December, lifting the 4Q14 estimate to 78.2 mb/d. Throughputs are forecast however to ease seasonally to 77.8 mb/d in 1Q15 amid brimming product inventories, weakening margins, lower demand and increased refinery maintenance.
• OECD commercial inventories drew less than usual in November, falling by 8.7 mb to 2 697 mb. As OECD refiners hiked runs, crude stocks drew while product stocks increased. Preliminary data indicate a 12.5 mb build in December, which would see stocks rise to their widest surplus versus the five-year average since August 2010.
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Another month, another milestone. Brent and WTI futures prices crashed to near six-year lows in early January, before recouping some losses at mid-month. At the time of writing, both Brent and WTI were trading around $48/bbl, down by $16/bbl and $12/bbl, respectively, since last month's Report, and some 60% below their June highs. While supply and demand forecasts have long pointed at a market imbalance and associated stock builds in 2H14 and beyond, few would have expected such a sudden price collapse. Today's market participants are not ruling out further declines, however, despite the recent rebound. How low the market's floor will be is anybody's guess. But the selloff is having an impact. A price recovery - barring any major disruption - may not be imminent, but signs are mounting that the tide will turn.

The most tangible price effects are on the supply front. Upstream spending plans have been the first casualty of the market's rout. Companies have been taking an axe to their budgets, postponing or cancelling new projects, while trying to squeeze the most out of producing fields. For the most part the supply effects will not be felt immediately, but further down the road, through project delays and faster decline rates. Nevertheless, expectations of non-OPEC supply growth for 2015 have already been downgraded, with growth for the year adjusted downwards by 350 kb/d since last month's Report and more steeply so for 2H15. Colombia and Canada lead the declines. Expectations of US light, tight oil production growth have also been revisited, but so far the cuts do not exceed 80 kb/d compared with our already conservative previous estimates, as many producers appear to be well hedged against short-term price drops.

Signs of a demand response remain more elusive. With a few notable exceptions such as the US, lower prices do not appear to be stimulating demand just yet. That is because the usual benefits of lower prices - increased household disposable income, reduced industry input costs - have been largely offset by weak underlying economic conditions, which have themselves been a major reason for the price drop in the first place. Other factors, including weak currencies in consumer economies, subsidy cuts, consumer tax hikes, lower spending in producer countries and mounting deflationary concerns, have kept demand growth in check thus far. Demand growth is still forecast to pick up somewhat this year from last, but is not expected to exceed 900 kb/d, unchanged since last month.

The net result of these changes is that implied stock builds are set to continue through the first half of this year, albeit at a marginally lower rate than previously expected. Downward pressures from stockpiling continue, as reflected in the futures curve's steeper contango structure - when prompt barrels trade at discount to later ones - and signs of growing market interest in floating storage. But a rebalancing may begin to occur in the second half of the year, when the "call on OPEC and stock changes" is now forecast to rebound to an average 29.8 mb/d, just a shade below the group's long-standing production target. For 2015 as a whole, the "call" has been revised upwards by 300 kb/d since last month's Report. Longer-term effects will be discussed in the upcoming Medium-Term Oil Market Report, to be released on 10 February.

Rebalancing of the market does not equate to a return to the status quo ante. It is clear that the market is undergoing a historic shift. OPEC's embrace of market forces last November is a game changer. So is the US light, tight oil revolution. Thanks to its short lead-time and low upfront capital costs, LTO may prove quicker to ramp up production than conventional supply. Oil's place in the global energy mix is also transforming. While there might be light at the end of the tunnel for producers as far as prices are concerned, the next few years could nevertheless prove a period of reckoning for a market and an industry that, through the course of their 150-year history, have had to periodically reinvent themselves.