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BP reflects on oil market's 'year of adjustment'

13 Jun 2017 14:30 (+01:00 GMT)
BP reflects on oil market's 'year of adjustment'

London, 13 June (Argus) — Last year marked a much-needed adjustment in the oil market during which a sharp slowdown in production growth and a robust increase in consumption led to a rebalancing of supply and demand, BP said today in its annual Statistical Review of World Energy.

"The combination of strong demand and weak supply was sufficient for the excess supply that had persisted since the middle of 2014 to be gradually absorbed, with the oil market moving broadly into balance by the middle of the year," BP chief economist Spencer Dale said. "But not before inventories had increased even further from their already elevated levels, such that the level of OECD commercial inventories by the end of 2016 was around 300mn bl above their five-year average," he said.

The biggest adjustment in the market came on the supply side. Global oil production rose by just under 450,000 b/d, or 0.5pc, to reach 92.15mn b/d. This is the slowest rate of growth since 2009.

Opec liquids output increased by just over 1.2mn b/d, boosted by a faster-than-expected recovery in Iranian production following the lifting of nuclear-related sanctions, BP estimates. This was partly offset by a 780,000 b/d decline in non-Opec output, the biggest fall in almost 25 years. The drop in non-Opec supply was driven by a fall of around 300,000 b/d in US tight oil production.

"Tight oil lived up to its billing," Dale said. "It did respond far more quickly to price changes than global conventional oil and, as such, dampened price volatility on both the downside and, more recently, the upside."

Dale cautioned against underestimating the resilience of US tight oil.

"Trying to kill off tight oil makes no sense," he said. "Tight oil is not the marginal barrel in the longer run — other types of oil have higher all-in costs. As the market adjusts and prices recover, it will spring back, exactly as we are seeing."

Opec fully understands this, Dale said. The organisation's decision late last year to cut production is designed to address the "short-term aberration" of high stock levels, rather than an attempt to reverse the structural shift in the market caused by tight oil.

"It is understandable that Opec did not cut in November 2014 because the emergence of tight oil was a structural shock, over which it had little power," Dale said. "In contrast, the most recent cuts are focused on the temporary issue of how quickly stocks unwind, where Opec's actions can be effective," he said.

Last year's supply growth was outpaced by the rise in consumption. BP estimated global oil demand rose by 1.6mn b/d, or 1.6pc, to reach 96.6mn b/d last year, helped by the lowest average crude prices since 2004. It was the second year in a row that consumption grew at a faster rate than the average of the previous 10 years. India and Europe had unusually strong increases in demand, at around 300,000 b/d each. Chinese demand rose by 400,000 b/d, which was subdued compared with the country's consumption growth in 2015.

Consumer-led fuels, such as gasoline and jet fuel, drove demand growth in 2016, supported by lower prices. Diesel consumption, on the other hand, fell for the first time since 2009, partly because of a slowdown in industrial activity in the US and China.

Oil made up around 33pc of primary energy demand last year, broadly unchanged from 2015.

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