The OPEC Reference Basket has improved considerably from the low levels seen at the start of this year to
average $43.21/b in May. For the same month, ICE Brent averaged $47.65/b and Nymex WTI averaged
$46.68/b (Graph 1). Crude oil prices were supported by the weaker US dollar, strong gasoline consumption
in the US, various supply disruptions, the accelerated decline in US crude oil output, and forecasts for a
sharp fall in overall non-OPEC oil supply this year. Record bullish bets by speculators for higher futures
prices also helped support market sentiment.
Despite a relatively weak start to the year, the global economy is forecast to rebound over the remainder of
the year to reach global growth of 3.1%, after 2.9% in the past year. In the OECD, the US is expected to
improve from the weak growth seen in the beginning of 2016. Growth in the economy of the Euro-zone is
projected to be slightly more muted after the healthy growth estimated for 1H16, with the vote on a Brexit
being a key uncertainty.
After relatively robust growth estimated for 1H16, Japan’s growth trend is not seen
improving further from the current level. Outside the OECD, further improvements in Russia’s economy are
expected, supported by rising commodity prices, including for oil and gas. Brazil remains in a challenging
situation, although an improving domestic situation, together with higher commodity prices leading to a
positive net balance of trade, could contribute to a better performance in 2H16. Growth in China is expected
to slow somewhat from the healthy pace seen in 1H16, while India’s economy is forecast to continue to enjoy
an elevated growth level for the remainder of the year.
Turning to the oil market, world oil demand growth in the second half of the year is projected to continue
rising by 1.2 mb/d y-o-y. The OECD is anticipated to add around 0.2 mb/d, with OECD Americas leading
growth at 0.3 mb/d, while OECD Europe is seen flat and OECD Pacific contracting by almost 0.1 mb/d. Key
factors impacting OECD oil demand growth will be retail price developments during the driving season and
heating demand in the Northern Hemisphere by the end of the year. In the non-OECD, oil demand is
anticipated to grow by 1.0 mb/d y-o-y in the second half of the year. Demand is projected to be supported by
Other Asia with growth of around 0.4 mb/d y-o-y. Much of this growth is seen coming from India, where
projections for macroeconomic indicators are currently solid. In China, support will come from transportation
and petrochemical sectors, while industrial fuel consumption is expected to contract.
On the supply side, non-OPEC supply in the second half of the year is anticipated to be some 140 tb/d
weaker than in 1H16 and almost 1 mb/d lower compared to the same period last year. In the Developing
Countries, supply is seen growing by 270 tb/d compared to the estimate in 1H16, which will broadly offset a
280 tb/d decline expected in OECD supply over the same period. FSU oil production in the second half is
projected to decline by 200 tb/d, with Russian oil production contracting by 120 tb/d. Over the same period,
China’s output is expected to increase by 60 tb/d and production in Brazil is expected to increase by 270 tb/d
due to the start-up of two new projects. In the US, despite higher growth in the Gulf of Mexico, total US
output will decline by 150 tb/d in the second half of the year compared to 1H16. With the recovery of
production disrupted by wildfire, supply in Canada is expected to grow by 60 tb/d compared to 1H16.
The above projections indicate that the excess supply in the market is likely to ease over the coming
quarters. To some degree, this has started to be seen in the slowing pace of inventory builds in US
commercial crude stocks (Graph 2). In May, commercial crude stocks saw a draw of around 8 mb,
compared to an average 12 mb build over March and April, and a 19 mb increase over January and
February. Provided that there is a clearer picture regarding oil supply and demand, the expected
improvement in global economic conditions should result in a more balanced oil market toward the end of the
year. In the second half, demand for OPEC crude is expected to average 32.6 mb/d.