September 26, 2017 / 7:29 AM / a year ago

'Surprisingly' strong oil demand growth puts market re-balancing on track - executives

SINGAPORE (Reuters) - Strong oil demand growth in emerging economies led by China and India and even from Europe is drawing down oil stockpiles faster than expected, putting the global market firmly on track to re-balance, senior oil executives said on Tuesday.

FILE PHOTO: Employees close a valve of a pipe at a PetroChina refinery in Lanzhou, Gansu province January 7, 2011. REUTERS/Stringer/File Photo

Global oil benchmark Brent LCOc1 rose to the highest since July 2015 on Tuesday after Turkey threatened to cut crude exports from Iraq’s Kurdistan region. Prices rallied in the third quarter as producers from the Organization of the Petroleum Exporting Countries (OPEC) and non-OPEC producers cut output and as hurricanes squeezed fuel output in the United States.

“We see the market over the next six months going well above $60 for a simple reason ... surprisingly good demand,” said Adi Imsirovic, head of oil trading at Gazprom Marketing and Trading, told the S&P Global Platts APPEC conference in Singapore.

“We see backwardation here to stay, we see the market tightening strongly, we see oil moving out of storage quite fast.”

The premium of first-month Brent futures over second-month futures is at the highest since April 2016. That market structure, known as backwardation, indicates there is strong immediate demand for oil. LCOc1-LCOc2

“There are forecasts that demand could pass the threshold of 100 million barrels per day (bpd) of crude and liquids even in the next months or next year,” Eni (ENI.MI) Trading and Shipping Chief Executive Officer Franco Magnani said at the conference.

“Demand and supply is slowly aligning. Most of the economies in the world are still growing or relatively stable. The region where we come from, Europe, after years of trouble, apparently is starting to digest the consequences of the crisis that we had 6 to 7 years ago.”

The resumption of oil demand growth in industrialized nations and robust consumption in China are key in driving oil demand up 1.88 million bpd in 2017 from 2016, according to forecasts from PIRA. The consultancy expects demand growth to stay strong in 2018, at 1.78 million bpd, as India’s oil demand growth speeds up.

Among oil products, demand for middle distillates - diesel and jet fuel - has taken the industry by surprise.

“Global demand growth is way higher than what we have observed in the last couple of years, coming somewhere close to 1.6 to 1.7 million barrels per day and is driven by distillates”, said Janet Kong, BP’s chief executive officer, supply and trading, Eastern Hemisphere.

“Two to three years ago, we were talking about the end of the industrialization cycle in the emerging market and as a result gasoline demand growth would drive the barrels rather than distillate, but 2017 is different.”

While U.S. crude futures CLc1 have also risen, its discount against Brent is at its widest since August 2015 weighed down by increasing U.S. shale oil production growth.

U.S. shale producers’ ability to ramp up output as later-dated crude prices strengthen will keep price volatility low, said Jeffrey Currie, Goldman Sachs’ head of global commodities research.

OPEC and non-OPEC producers will also have to extend output cuts beyond March, when they are set to expire, to keep up the market re-balancing momentum, said Nadia Martin Wiggen, senior vice president of markets at consultancy Rystad Energy.

“If OPEC does not extend their cuts beyond 1Q 18, we would no longer see stock draws from 2Q 18 and we forecast builds from 3Q 18,” she said.

Reporting by Florence Tan, Roslan Khasawaneh, Seng Li Peng, Rania El-Gamal and Mark Tay in SINGAPORE; Editing by Christian Schmollinger

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