1. Unplanned supply outages, particularly in Africa are likely to continue to support Brent crude prices during 2014. Morgan Stanley sees supply outages remaining in the range of 1.5-2 million b/d with Libya likely to account for around 1 million b/d. As we discussed in an earlier article this is likely to be an underestimate as complex oil fields located in increasingly unstable countries means the probability of disruption is likely to rise. Analysts were increasingly optimistic about Libyan oil output as rebels started to return occupied crude export terminals to the government. However signs of a split in the government led by a rogue general point to further turmoil in the OPEC oil exporter. Meanwhile discontent in Nigeria stirred by oil wealth inequality and Islamic militants could well lead to further oil outages and an increased risk premium for companies operating in the region.
2. Although tensions between Ukraine and Russia appear to have eased for now, or at least Putin is making a tactical retreat ready for his next move, the prospect of further unrest in the region and sanctions against Russian oil companies is likely to remain a risk for oil prices. The next key dates are 25 May, when elections take place in Ukraine and then 3 June, the date Gazprom has said it may halt natural gas shipments to Ukraine unless the country pays in advance for its supplies.
3. The Chinese appear to have been aggressively filling their strategic oil stockpiles since the start of 2014. One reason they may have brought their stockpiling forward is in case of any disruption due to unrest between Ukraine and Russia. Although China’s record imports of 6.78 million b/d in April give the impression that oil demand is roaring ahead in reality some 360 thousand b/d has gone into stockpiles – totaling 43.5 million barrels so far this year. Barclay’s estimates that China may fill an additional 15 million barrels during 2014. According to Deutsche Bank the Chinese are dipping into the market whenever Brent falls near £105 per barrel. Although the Chinese are likely to keep on buying later in the year the level of support is unlikely to be as strong as in the past five months.
4. US crude stockpiles are near 400 million barrels, the highest level since the Energy Information Administration began publishing weekly data in 1982. This is likely to be as high as it gets though in 2014. As the US heads into the summer driving season however demand from refineries is likely to start picking up calling on crude stockpiles and leading to higher oil prices during the second and third quarter (see article on seasonal crude price patterns).
5. Stronger global economic growth means oil demand is likely to grow strongly in 2014. According to the IEA OPEC will need to hike production by 900 thousand b/d in the third quarter from April levels in order to balance the increase in demand. While OPEC producers can potentially do this the ongoing issue of unplanned outages may prevent this increase in output being achieved (see point 1).