global crude oil outlook 2019 - amazon s3 · 2019-01-29 · the purpose of the recently launched...
TRANSCRIPT
GLOBALCRUDE OILOUTLOOK 2019
Demand to slow in 2019 still underpinned by China and India
Lower prices and downstream expansion will be supportive
US production still a wildcard with large volumes of US oil to hit the market
Tightening monetary conditions and a stronger US dollar may hurt supply and demand
Early effects of IMO 2020 to potentially strain the refining complex
Middle East risk steady with Saudi Arabia likely to support further cuts
The ICIS Outlook
Copyright 2019 Reed Business Information Ltd ICIS is a member of RBI and is part of RELX Group plc ICIS accepts no liability for commercial decisions based on this content
BY JULIEN MATHONNIERE JANUARY 2019
GLOBAL CRUDE OIL OUTLOOK 2019WILL CRUDE OIL DEMAND SUBSIDE IN 2019 A BRIEF RISK OVERVIEW
Global oil demand is projected to have grown by about 150m bblday in 2018 a slower level than in 2017 but still a healthy one Beyond the core air marine and road transportation fuels the call on oil as a petrochemical feedstock has been a powerful growth engine
In the US the expansion of chemical capacity has supported demand for liquid hydrocarbons (crude oil and natural gas liquids) as in Japan where the petrochemical industry is expected to remain one of the main sources of demand in 2019 Likewise South Korearsquos petrochemical and industrial sectors have captured the bulk of oil demand growth in 2018 and are forecast to keep the same trajectory in 2019
On the non-OECD side China has propped up global crude demand through a thriving petrochemical industry and a developing middle class that supports steady car sales and higher gasoline consumption Several large downstream expansion projects are set to provide some demand upside too
The country also retains a crucial role as a major foreign investor notably in the Middle East region where the future path of energy commodity prices will be key The 400000 bblday YASREF joint venture between Saudi Aramco and Sinopec is an example of that funnelling of Chinese funds into global downstream projects
Likewise in India domestic consumption and the rise of a large middle class fuel crude oil demand The country notably owns the worldrsquos largest refinery in Jamnagar Gujarat a 124m bblday plant partly quenching the fuel thirst of its east coast metropolis Mumbai and nearby Pakistan
CHINArsquoS RESPONSE TO US STANCEChina has been caught in a trade spat with the US and both countries were still trying to iron out their different on trade tariffs in early 2019 China remains highly dependent on resource imports priced in US dollars Therefore the
Global crude oil demand may slow in 2019 on tighter liquidity and a slightly higher risk of economic down cycle However lower prices and downstream expansion in particular in the petrochemical sector will be supportive The US remains a wildcard with no intent to be tied in a production agreement Price and supply wise its Middle East ally Saudi Arabia still stands at loggerheads The level of geopolitical risk will remain steady including the US hard stance against China and Iran and volatile politics in the wider Arab Gulf region
country has a strong incentive to ldquode-dollariserdquo commodity prices and promote a greater use of the renminbi its national currency
The purpose of the recently launched crude oil future contract on the Shanghai Futures Exchange (INE) was a first step in that direction allowing Chinese buyers to lock in oil prices and pay in their domestic currency
In theory it might be a threat to the US dollarrsquos well-established role as the worldrsquos main petro-currency even if the Chinese yuan is still a long way from dethroning the US dollar Beyond a renminbi-denominated oil (or precious metal) future contract the renminbi will also need to be a credible alternative with a track record as a strong currency (strong cash returns)
Regardless the INE crude oil futures have picked up market share from Brent and WTI throughout 2018 For investors willing to assume foreign exchange risk China is a thriving very liquid market However there is a risk of losing control of the exchange rate when swapping Chinese yuans for US dollars One possible short-term improvement could be to link Chinarsquos oil futures to gold as an alternative for international payments
Source OECDIEA
OilTransport
Other industry
Power
Petrochemicals
Other
Buildings
14
5
5
56
8
12
PRIMARY OIL DEMAND BY SECTOR IN 2017
Copyright 2019 Reed Business Information Ltd ICIS is a member of RBI and is part of RELX Group plc ICIS accepts no liability for commercial decisions based on this content
However China exhibits a weakening credit growth despite six months of cautious policy support
Unless the country decides to implement stronger fiscal stimulus its GDP is expected to weaken until the second quarter of 2019 with growth forecast at around 61 down from 65 in 2018 And Chinarsquos demand remain critical to the global markets including for crude oil
A HIGHER RISK OF DOWNTURNThe Fedrsquos five-year break-even rate which represents investorsrsquo view on the annual inflation rate until 2023 is now standing at around 150 indicating that markets are not overtly concerned about the inflation risk
Yet there is a higher risk of economic downturn in 2019 and a stronger probability that the US economy may converge with other developed nations economies
Global economic growth is forecast to weaken from about 37 in 2018 to 35 in 2019 The wider analystsrsquo consensus clearly points to downside risk but without any indicators suggesting a real risk of recession in 2019
India will remain the fastest-growing economy at about 72 followed by China at an expected 61 In comparison the US will hover around 26 and the Eurozone at 17
As a result a number of money managers have encouraged their clients to stock up on lower-risk more liquid assets to defend against rising volatility and widening credit spreads As they save cash for opportunities ahead some investors may be less willing to invest in replacement oil reserves and new long-drawn oil exploration and production projects Although this is unlikely to affect oil prices in the short-term it increases the possibility of a supply crunch in the mid to long-term
On the other hand it may also stave off the appetite for risky ventures beyond the well-surveyed area of the US oil patch Again this may help cap the potential upside of US crude output
TIGHTENING LIQUIDITYLower oil prices are likely to boost demand but OPECrsquos efforts will have little bearing on the global economy Global oil prices may be influenced by less visible developments among which a drain on US dollar liquidity
The current monetary tightening which materialised in a fourth policy rate increase by the US Federal Reserve and hence a stronger US dollar has put emerging economies under strain
Source Shanghai International Exchange (INE)
Month+1 Month+2 Month+3 Month+4 Month+5 Month+6
Number of open positions80000
70000
60000
50000
40000
30000
20000
10000
0
1111
9
1228
18
1214
18
1130
18
1116
18
112
18
1019
18
9281
8
9141
8
8311
8
8171
8
8318
7201
8
7618
6221
8
6818
5251
8
5111
8
4271
8
4131
8
3301
8
CHINA CRUDE OIL FUTURES OPEN INTEREST FOR THE SIX FRONT-MONTH CONTRACTS SINCE INTRODUCTION
Source US Federal Reserve Saint-Louis (FRED)
22
20
18
16
14
12
10
08
Jan-2
019
Jan-2
014
Apr-201
4
Jul-2
014
Oct-2
014
Jan-2
015
Apr-201
5
Jul-2
015
Oct-2
015
Jan-2
016
Apr-201
6
Jul-2
016
Oct-2
016
Jan-2
017
Apr-201
7
Jul-2
017
Oct-2
017
Jan-2
018
Apr-201
8
Jul-2
018
Oct-2
018
US FEDERAL RESERVE 5-YEAR BREAKEVEN INFLATION RATE
Source CME Group
88
89
90
91
92
93
94
95
96
97
98
Jan-2019
Dec-2018
Nov-2018
Oct-2018
Sep-2018
Aug-2018
Jul-2018
Jun-2018
May-2018
Apr-2018
Mar-2018
Feb-2018
Jan-2018
Dec-2017
Nov-2017
Oct-2017
Sep-2017
Aug-2017
US DOLLAR INDEX (DXY)
Copyright 2019 Reed Business Information Ltd ICIS is a member of RBI and is part of RELX Group plc ICIS accepts no liability for commercial decisions based on this content
Emerging market equities were down 25 between late January 2018 and late November 2018 with a low probability of rebounding in 2019 without more government spending from China (government spending) Global oil demand is forecast to grow by about 129m bblday in 2019 104m bblday of which will come from non-OECD countries according to OPEC
There is strong refined product growth from countries like India Indonesia Singapore and Thailand For the past few years those emerging economies have benefited from high liquidity and tight fiscal policies but the trend is inverting towards looser policies and tighter monetary supply
The run-up in US Treasury yields and appreciation of the dollar hence poses a significant stress test to the global financial system It also means that the cost of borrowing money will increase and that pending higher oil prices some oil fields may not be profitable at $50bbl especially in the US
Given the ample crude supply early into 2019 the oil market may balance at a lower marginal cost of production which means that higher-cost barrels will be priced out of the market
THE US WILDCARDSo far US shale drillers have benefited from cheap money and little oilfield service cost inflation But a tighter monetary market may put some of them under duress in 2019
Markets run on sentiments more than numbers and a rise in recession fears is a stronger risk in 2019 Although trade frictions have now partially been baked into commodity prices investorsrsquo reactions remain unpredictable
Beyond the risk of an unbalanced oil market US oil remains the wild card in 2019 being no party to any supply agreement
US shale drillers have proved more responsive to price swings than big oil but their aggregate response is extremely difficult to gauge since they do not coordinate their supply decisions
Likewise consumption responds to changes in price with a 6 to 18 month lag By the time demand destruction becomes visible it is too late and prices will have risen too much
With prices low enough the US Administration still has a good hand in the game President Donald Trump has backed off on his threats on Iran but he still has the ability to punish and can decide to go harder on the Islamic Republic within the next six months
US Federal Reserve Chairman Jerome Powell recently reasserted its independence after being criticised by the US President In other words even if a pause is US Fed policy rate hikes is probable in the first half of 2019 monetary tightening will persist as the Fed continues to re-purchase bonds and stocks to reduce its balance sheet holdings effectively removing cash from the US economy
THE PREMISES OF IMO 2020The first effects of International Maritime Organisation (IMO) 2020 new sulphur regulation may also start to be visible in 2019 or at least to begin to translate into a number of downstream production patterns
The new IMO 2020 regulation will come into force on 1 January 2020 setting the new global sulphur cap for marine fuels at 05 Sources EIA Russian Ministry of Energy JODI
US production Saudi production Russian production
in million barrels per day12M
11M
10M
9M
8M
7M
6M
5M
101184118
101174117
101164116
101154115
101144114
101134113
101124112
101114111
101104110
10194109
RUSSIAN OIL PRODUCTION VS SAUDI ARABIA AND THE US
Copyright 2019 Reed Business Information Ltd ICIS is a member of RBI and is part of RELX Group plc ICIS accepts no liability for commercial decisions based on this content
The resulting margin effects will be more or less visible depending on refineriesrsquo complexity and flexibility Complex refineries could benefit from higher margins if the price of their crude intake drops
MIDDLE EAST RISKSIn the Middle East Washington has turned its back on Iran again leaving more leeway to Russian influence Meanwhile its Saudi ally is unlikely to lift the embargo against Qatar in 2019 also pushing Doha further into the destabilising arms of Turkey and Iran
Turkeyrsquos lira was among the worst currency performers in 2018 and the country still relies heavily on foreign influence As a result increased pressure on the countryrsquos central bank may unwind some of the tightening delivered in the second half of 2018 especially as the March 2019 elections loom
Saudi Arabia still produces some of the cheapest barrels in the world at less than $10bbl but according to the IMF the countryrsquos fiscal break-even price based on its current
Although compliance over the first year is estimated to be around 75 higher refinery runs of at least 400000 bblday will be needed to meet the required move to the new global bunker fuel standard
This is expected to strain the refining system as the production of cleaner and lower-sulphur products will have to replace that of higher-sulphur residual fuel
This may widen differentials between light clean and heavy dirty products even if the penetration of scrubbing technology is expected to progress at scale and partly offset demand for cleaner fuels - at least in the immediate aftermath of the new regulation
A strained refining market will in turn affect the crude oil market as well as product differentials There are expectations in the longer-run that low-sulphur crude may command a stronger premium while discounts for heavy sour grades could potentially widen significantly
Source ICE CME Group
Brent M1-M13Brent M1-M7
$8bbl
RED (or negative) indicates CONTANGO
BLUE (or positive) indicates BACKWARDATION$6bbl
$4bbl
$2bbl
$0bbl
-$2bbl
-$4bbl
-$6bbl
-$8bbl
-$10bbl
111
518
928
18
813
18
626
18
59
18
321
18
21
18
121
317
102
617
98
17
724
17
66
17
419
17
31
17
112
17
112
416
107
16
822
16
75
16
518
16
331
16
211
16
BRENT TERM STRUCTURE(CONTANGOBACKWARDATION)
Source IMF
$0
$20
$40
$60
$80
$100
$120
201920182017201620152014201320122011201020092008
in US dollars per barrel annualised
73
BREAKEVEN FISCAL OIL PRICE FOR SAUDI ARABIA
n Access daily price assessments on 57 key crude grades from the primary information provider to the ICE Brent futures
n Comprehensive crude oil coverage delivered in three daily updates including details on China crude supply and demand data and refinery markets
n Our global experts collate data from a wide range of market players and use a robust methodology to assess it
Find out more
A TRUSTED SOURCE FOR INDEPENDENT EXPERT VIEWS AND DATA ON THE GLOBAL CRUDE OIL MARKET
Copyright 2019 Reed Business Information Ltd ICIS is a member of RBI and is part of RELX Group plc ICIS accepts no liability for commercial decisions based on this content
government expenditure stands in excess of $70bbl This may pledge in favour of additional production cuts in 2019 as the country already hinted to
More worryingly maybe the postponed Saudi Aramcorsquos IPO has epitomised the kingdomrsquos unpredictable foreign policy and highly volatile domestic politics dealing investorsrsquo confidence a serious blow
A new generation of rulers in the Middle East has challenged the time-long model of tenured predictable leadership which is now becoming an exception rather than the rule
Higher prices tend to spur additional production volumes from OPEC but also from non-OPEC countries especially from the US But too high a clearing price could also dent global demand growth
With a higher chance of economic slowdown in 2019 a jolt in prices seems unlikely but on the other hand cheaper oil prices will help sustain demand into the first half of the year
The plan for oil producers is now to gradually return to a backwardated Brent market whereby prompt prices are higher than longer-dated future prices usually in response to tighter supply
Keep up with the latest energy news and insights
Copyright 2019 Reed Business Information Ltd ICIS is a member of RBI and is part of RELX Group plc ICIS accepts no liability for commercial decisions based on this content
BY JULIEN MATHONNIERE JANUARY 2019
GLOBAL CRUDE OIL OUTLOOK 2019WILL CRUDE OIL DEMAND SUBSIDE IN 2019 A BRIEF RISK OVERVIEW
Global oil demand is projected to have grown by about 150m bblday in 2018 a slower level than in 2017 but still a healthy one Beyond the core air marine and road transportation fuels the call on oil as a petrochemical feedstock has been a powerful growth engine
In the US the expansion of chemical capacity has supported demand for liquid hydrocarbons (crude oil and natural gas liquids) as in Japan where the petrochemical industry is expected to remain one of the main sources of demand in 2019 Likewise South Korearsquos petrochemical and industrial sectors have captured the bulk of oil demand growth in 2018 and are forecast to keep the same trajectory in 2019
On the non-OECD side China has propped up global crude demand through a thriving petrochemical industry and a developing middle class that supports steady car sales and higher gasoline consumption Several large downstream expansion projects are set to provide some demand upside too
The country also retains a crucial role as a major foreign investor notably in the Middle East region where the future path of energy commodity prices will be key The 400000 bblday YASREF joint venture between Saudi Aramco and Sinopec is an example of that funnelling of Chinese funds into global downstream projects
Likewise in India domestic consumption and the rise of a large middle class fuel crude oil demand The country notably owns the worldrsquos largest refinery in Jamnagar Gujarat a 124m bblday plant partly quenching the fuel thirst of its east coast metropolis Mumbai and nearby Pakistan
CHINArsquoS RESPONSE TO US STANCEChina has been caught in a trade spat with the US and both countries were still trying to iron out their different on trade tariffs in early 2019 China remains highly dependent on resource imports priced in US dollars Therefore the
Global crude oil demand may slow in 2019 on tighter liquidity and a slightly higher risk of economic down cycle However lower prices and downstream expansion in particular in the petrochemical sector will be supportive The US remains a wildcard with no intent to be tied in a production agreement Price and supply wise its Middle East ally Saudi Arabia still stands at loggerheads The level of geopolitical risk will remain steady including the US hard stance against China and Iran and volatile politics in the wider Arab Gulf region
country has a strong incentive to ldquode-dollariserdquo commodity prices and promote a greater use of the renminbi its national currency
The purpose of the recently launched crude oil future contract on the Shanghai Futures Exchange (INE) was a first step in that direction allowing Chinese buyers to lock in oil prices and pay in their domestic currency
In theory it might be a threat to the US dollarrsquos well-established role as the worldrsquos main petro-currency even if the Chinese yuan is still a long way from dethroning the US dollar Beyond a renminbi-denominated oil (or precious metal) future contract the renminbi will also need to be a credible alternative with a track record as a strong currency (strong cash returns)
Regardless the INE crude oil futures have picked up market share from Brent and WTI throughout 2018 For investors willing to assume foreign exchange risk China is a thriving very liquid market However there is a risk of losing control of the exchange rate when swapping Chinese yuans for US dollars One possible short-term improvement could be to link Chinarsquos oil futures to gold as an alternative for international payments
Source OECDIEA
OilTransport
Other industry
Power
Petrochemicals
Other
Buildings
14
5
5
56
8
12
PRIMARY OIL DEMAND BY SECTOR IN 2017
Copyright 2019 Reed Business Information Ltd ICIS is a member of RBI and is part of RELX Group plc ICIS accepts no liability for commercial decisions based on this content
However China exhibits a weakening credit growth despite six months of cautious policy support
Unless the country decides to implement stronger fiscal stimulus its GDP is expected to weaken until the second quarter of 2019 with growth forecast at around 61 down from 65 in 2018 And Chinarsquos demand remain critical to the global markets including for crude oil
A HIGHER RISK OF DOWNTURNThe Fedrsquos five-year break-even rate which represents investorsrsquo view on the annual inflation rate until 2023 is now standing at around 150 indicating that markets are not overtly concerned about the inflation risk
Yet there is a higher risk of economic downturn in 2019 and a stronger probability that the US economy may converge with other developed nations economies
Global economic growth is forecast to weaken from about 37 in 2018 to 35 in 2019 The wider analystsrsquo consensus clearly points to downside risk but without any indicators suggesting a real risk of recession in 2019
India will remain the fastest-growing economy at about 72 followed by China at an expected 61 In comparison the US will hover around 26 and the Eurozone at 17
As a result a number of money managers have encouraged their clients to stock up on lower-risk more liquid assets to defend against rising volatility and widening credit spreads As they save cash for opportunities ahead some investors may be less willing to invest in replacement oil reserves and new long-drawn oil exploration and production projects Although this is unlikely to affect oil prices in the short-term it increases the possibility of a supply crunch in the mid to long-term
On the other hand it may also stave off the appetite for risky ventures beyond the well-surveyed area of the US oil patch Again this may help cap the potential upside of US crude output
TIGHTENING LIQUIDITYLower oil prices are likely to boost demand but OPECrsquos efforts will have little bearing on the global economy Global oil prices may be influenced by less visible developments among which a drain on US dollar liquidity
The current monetary tightening which materialised in a fourth policy rate increase by the US Federal Reserve and hence a stronger US dollar has put emerging economies under strain
Source Shanghai International Exchange (INE)
Month+1 Month+2 Month+3 Month+4 Month+5 Month+6
Number of open positions80000
70000
60000
50000
40000
30000
20000
10000
0
1111
9
1228
18
1214
18
1130
18
1116
18
112
18
1019
18
9281
8
9141
8
8311
8
8171
8
8318
7201
8
7618
6221
8
6818
5251
8
5111
8
4271
8
4131
8
3301
8
CHINA CRUDE OIL FUTURES OPEN INTEREST FOR THE SIX FRONT-MONTH CONTRACTS SINCE INTRODUCTION
Source US Federal Reserve Saint-Louis (FRED)
22
20
18
16
14
12
10
08
Jan-2
019
Jan-2
014
Apr-201
4
Jul-2
014
Oct-2
014
Jan-2
015
Apr-201
5
Jul-2
015
Oct-2
015
Jan-2
016
Apr-201
6
Jul-2
016
Oct-2
016
Jan-2
017
Apr-201
7
Jul-2
017
Oct-2
017
Jan-2
018
Apr-201
8
Jul-2
018
Oct-2
018
US FEDERAL RESERVE 5-YEAR BREAKEVEN INFLATION RATE
Source CME Group
88
89
90
91
92
93
94
95
96
97
98
Jan-2019
Dec-2018
Nov-2018
Oct-2018
Sep-2018
Aug-2018
Jul-2018
Jun-2018
May-2018
Apr-2018
Mar-2018
Feb-2018
Jan-2018
Dec-2017
Nov-2017
Oct-2017
Sep-2017
Aug-2017
US DOLLAR INDEX (DXY)
Copyright 2019 Reed Business Information Ltd ICIS is a member of RBI and is part of RELX Group plc ICIS accepts no liability for commercial decisions based on this content
Emerging market equities were down 25 between late January 2018 and late November 2018 with a low probability of rebounding in 2019 without more government spending from China (government spending) Global oil demand is forecast to grow by about 129m bblday in 2019 104m bblday of which will come from non-OECD countries according to OPEC
There is strong refined product growth from countries like India Indonesia Singapore and Thailand For the past few years those emerging economies have benefited from high liquidity and tight fiscal policies but the trend is inverting towards looser policies and tighter monetary supply
The run-up in US Treasury yields and appreciation of the dollar hence poses a significant stress test to the global financial system It also means that the cost of borrowing money will increase and that pending higher oil prices some oil fields may not be profitable at $50bbl especially in the US
Given the ample crude supply early into 2019 the oil market may balance at a lower marginal cost of production which means that higher-cost barrels will be priced out of the market
THE US WILDCARDSo far US shale drillers have benefited from cheap money and little oilfield service cost inflation But a tighter monetary market may put some of them under duress in 2019
Markets run on sentiments more than numbers and a rise in recession fears is a stronger risk in 2019 Although trade frictions have now partially been baked into commodity prices investorsrsquo reactions remain unpredictable
Beyond the risk of an unbalanced oil market US oil remains the wild card in 2019 being no party to any supply agreement
US shale drillers have proved more responsive to price swings than big oil but their aggregate response is extremely difficult to gauge since they do not coordinate their supply decisions
Likewise consumption responds to changes in price with a 6 to 18 month lag By the time demand destruction becomes visible it is too late and prices will have risen too much
With prices low enough the US Administration still has a good hand in the game President Donald Trump has backed off on his threats on Iran but he still has the ability to punish and can decide to go harder on the Islamic Republic within the next six months
US Federal Reserve Chairman Jerome Powell recently reasserted its independence after being criticised by the US President In other words even if a pause is US Fed policy rate hikes is probable in the first half of 2019 monetary tightening will persist as the Fed continues to re-purchase bonds and stocks to reduce its balance sheet holdings effectively removing cash from the US economy
THE PREMISES OF IMO 2020The first effects of International Maritime Organisation (IMO) 2020 new sulphur regulation may also start to be visible in 2019 or at least to begin to translate into a number of downstream production patterns
The new IMO 2020 regulation will come into force on 1 January 2020 setting the new global sulphur cap for marine fuels at 05 Sources EIA Russian Ministry of Energy JODI
US production Saudi production Russian production
in million barrels per day12M
11M
10M
9M
8M
7M
6M
5M
101184118
101174117
101164116
101154115
101144114
101134113
101124112
101114111
101104110
10194109
RUSSIAN OIL PRODUCTION VS SAUDI ARABIA AND THE US
Copyright 2019 Reed Business Information Ltd ICIS is a member of RBI and is part of RELX Group plc ICIS accepts no liability for commercial decisions based on this content
The resulting margin effects will be more or less visible depending on refineriesrsquo complexity and flexibility Complex refineries could benefit from higher margins if the price of their crude intake drops
MIDDLE EAST RISKSIn the Middle East Washington has turned its back on Iran again leaving more leeway to Russian influence Meanwhile its Saudi ally is unlikely to lift the embargo against Qatar in 2019 also pushing Doha further into the destabilising arms of Turkey and Iran
Turkeyrsquos lira was among the worst currency performers in 2018 and the country still relies heavily on foreign influence As a result increased pressure on the countryrsquos central bank may unwind some of the tightening delivered in the second half of 2018 especially as the March 2019 elections loom
Saudi Arabia still produces some of the cheapest barrels in the world at less than $10bbl but according to the IMF the countryrsquos fiscal break-even price based on its current
Although compliance over the first year is estimated to be around 75 higher refinery runs of at least 400000 bblday will be needed to meet the required move to the new global bunker fuel standard
This is expected to strain the refining system as the production of cleaner and lower-sulphur products will have to replace that of higher-sulphur residual fuel
This may widen differentials between light clean and heavy dirty products even if the penetration of scrubbing technology is expected to progress at scale and partly offset demand for cleaner fuels - at least in the immediate aftermath of the new regulation
A strained refining market will in turn affect the crude oil market as well as product differentials There are expectations in the longer-run that low-sulphur crude may command a stronger premium while discounts for heavy sour grades could potentially widen significantly
Source ICE CME Group
Brent M1-M13Brent M1-M7
$8bbl
RED (or negative) indicates CONTANGO
BLUE (or positive) indicates BACKWARDATION$6bbl
$4bbl
$2bbl
$0bbl
-$2bbl
-$4bbl
-$6bbl
-$8bbl
-$10bbl
111
518
928
18
813
18
626
18
59
18
321
18
21
18
121
317
102
617
98
17
724
17
66
17
419
17
31
17
112
17
112
416
107
16
822
16
75
16
518
16
331
16
211
16
BRENT TERM STRUCTURE(CONTANGOBACKWARDATION)
Source IMF
$0
$20
$40
$60
$80
$100
$120
201920182017201620152014201320122011201020092008
in US dollars per barrel annualised
73
BREAKEVEN FISCAL OIL PRICE FOR SAUDI ARABIA
n Access daily price assessments on 57 key crude grades from the primary information provider to the ICE Brent futures
n Comprehensive crude oil coverage delivered in three daily updates including details on China crude supply and demand data and refinery markets
n Our global experts collate data from a wide range of market players and use a robust methodology to assess it
Find out more
A TRUSTED SOURCE FOR INDEPENDENT EXPERT VIEWS AND DATA ON THE GLOBAL CRUDE OIL MARKET
Copyright 2019 Reed Business Information Ltd ICIS is a member of RBI and is part of RELX Group plc ICIS accepts no liability for commercial decisions based on this content
government expenditure stands in excess of $70bbl This may pledge in favour of additional production cuts in 2019 as the country already hinted to
More worryingly maybe the postponed Saudi Aramcorsquos IPO has epitomised the kingdomrsquos unpredictable foreign policy and highly volatile domestic politics dealing investorsrsquo confidence a serious blow
A new generation of rulers in the Middle East has challenged the time-long model of tenured predictable leadership which is now becoming an exception rather than the rule
Higher prices tend to spur additional production volumes from OPEC but also from non-OPEC countries especially from the US But too high a clearing price could also dent global demand growth
With a higher chance of economic slowdown in 2019 a jolt in prices seems unlikely but on the other hand cheaper oil prices will help sustain demand into the first half of the year
The plan for oil producers is now to gradually return to a backwardated Brent market whereby prompt prices are higher than longer-dated future prices usually in response to tighter supply
Keep up with the latest energy news and insights
Copyright 2019 Reed Business Information Ltd ICIS is a member of RBI and is part of RELX Group plc ICIS accepts no liability for commercial decisions based on this content
However China exhibits a weakening credit growth despite six months of cautious policy support
Unless the country decides to implement stronger fiscal stimulus its GDP is expected to weaken until the second quarter of 2019 with growth forecast at around 61 down from 65 in 2018 And Chinarsquos demand remain critical to the global markets including for crude oil
A HIGHER RISK OF DOWNTURNThe Fedrsquos five-year break-even rate which represents investorsrsquo view on the annual inflation rate until 2023 is now standing at around 150 indicating that markets are not overtly concerned about the inflation risk
Yet there is a higher risk of economic downturn in 2019 and a stronger probability that the US economy may converge with other developed nations economies
Global economic growth is forecast to weaken from about 37 in 2018 to 35 in 2019 The wider analystsrsquo consensus clearly points to downside risk but without any indicators suggesting a real risk of recession in 2019
India will remain the fastest-growing economy at about 72 followed by China at an expected 61 In comparison the US will hover around 26 and the Eurozone at 17
As a result a number of money managers have encouraged their clients to stock up on lower-risk more liquid assets to defend against rising volatility and widening credit spreads As they save cash for opportunities ahead some investors may be less willing to invest in replacement oil reserves and new long-drawn oil exploration and production projects Although this is unlikely to affect oil prices in the short-term it increases the possibility of a supply crunch in the mid to long-term
On the other hand it may also stave off the appetite for risky ventures beyond the well-surveyed area of the US oil patch Again this may help cap the potential upside of US crude output
TIGHTENING LIQUIDITYLower oil prices are likely to boost demand but OPECrsquos efforts will have little bearing on the global economy Global oil prices may be influenced by less visible developments among which a drain on US dollar liquidity
The current monetary tightening which materialised in a fourth policy rate increase by the US Federal Reserve and hence a stronger US dollar has put emerging economies under strain
Source Shanghai International Exchange (INE)
Month+1 Month+2 Month+3 Month+4 Month+5 Month+6
Number of open positions80000
70000
60000
50000
40000
30000
20000
10000
0
1111
9
1228
18
1214
18
1130
18
1116
18
112
18
1019
18
9281
8
9141
8
8311
8
8171
8
8318
7201
8
7618
6221
8
6818
5251
8
5111
8
4271
8
4131
8
3301
8
CHINA CRUDE OIL FUTURES OPEN INTEREST FOR THE SIX FRONT-MONTH CONTRACTS SINCE INTRODUCTION
Source US Federal Reserve Saint-Louis (FRED)
22
20
18
16
14
12
10
08
Jan-2
019
Jan-2
014
Apr-201
4
Jul-2
014
Oct-2
014
Jan-2
015
Apr-201
5
Jul-2
015
Oct-2
015
Jan-2
016
Apr-201
6
Jul-2
016
Oct-2
016
Jan-2
017
Apr-201
7
Jul-2
017
Oct-2
017
Jan-2
018
Apr-201
8
Jul-2
018
Oct-2
018
US FEDERAL RESERVE 5-YEAR BREAKEVEN INFLATION RATE
Source CME Group
88
89
90
91
92
93
94
95
96
97
98
Jan-2019
Dec-2018
Nov-2018
Oct-2018
Sep-2018
Aug-2018
Jul-2018
Jun-2018
May-2018
Apr-2018
Mar-2018
Feb-2018
Jan-2018
Dec-2017
Nov-2017
Oct-2017
Sep-2017
Aug-2017
US DOLLAR INDEX (DXY)
Copyright 2019 Reed Business Information Ltd ICIS is a member of RBI and is part of RELX Group plc ICIS accepts no liability for commercial decisions based on this content
Emerging market equities were down 25 between late January 2018 and late November 2018 with a low probability of rebounding in 2019 without more government spending from China (government spending) Global oil demand is forecast to grow by about 129m bblday in 2019 104m bblday of which will come from non-OECD countries according to OPEC
There is strong refined product growth from countries like India Indonesia Singapore and Thailand For the past few years those emerging economies have benefited from high liquidity and tight fiscal policies but the trend is inverting towards looser policies and tighter monetary supply
The run-up in US Treasury yields and appreciation of the dollar hence poses a significant stress test to the global financial system It also means that the cost of borrowing money will increase and that pending higher oil prices some oil fields may not be profitable at $50bbl especially in the US
Given the ample crude supply early into 2019 the oil market may balance at a lower marginal cost of production which means that higher-cost barrels will be priced out of the market
THE US WILDCARDSo far US shale drillers have benefited from cheap money and little oilfield service cost inflation But a tighter monetary market may put some of them under duress in 2019
Markets run on sentiments more than numbers and a rise in recession fears is a stronger risk in 2019 Although trade frictions have now partially been baked into commodity prices investorsrsquo reactions remain unpredictable
Beyond the risk of an unbalanced oil market US oil remains the wild card in 2019 being no party to any supply agreement
US shale drillers have proved more responsive to price swings than big oil but their aggregate response is extremely difficult to gauge since they do not coordinate their supply decisions
Likewise consumption responds to changes in price with a 6 to 18 month lag By the time demand destruction becomes visible it is too late and prices will have risen too much
With prices low enough the US Administration still has a good hand in the game President Donald Trump has backed off on his threats on Iran but he still has the ability to punish and can decide to go harder on the Islamic Republic within the next six months
US Federal Reserve Chairman Jerome Powell recently reasserted its independence after being criticised by the US President In other words even if a pause is US Fed policy rate hikes is probable in the first half of 2019 monetary tightening will persist as the Fed continues to re-purchase bonds and stocks to reduce its balance sheet holdings effectively removing cash from the US economy
THE PREMISES OF IMO 2020The first effects of International Maritime Organisation (IMO) 2020 new sulphur regulation may also start to be visible in 2019 or at least to begin to translate into a number of downstream production patterns
The new IMO 2020 regulation will come into force on 1 January 2020 setting the new global sulphur cap for marine fuels at 05 Sources EIA Russian Ministry of Energy JODI
US production Saudi production Russian production
in million barrels per day12M
11M
10M
9M
8M
7M
6M
5M
101184118
101174117
101164116
101154115
101144114
101134113
101124112
101114111
101104110
10194109
RUSSIAN OIL PRODUCTION VS SAUDI ARABIA AND THE US
Copyright 2019 Reed Business Information Ltd ICIS is a member of RBI and is part of RELX Group plc ICIS accepts no liability for commercial decisions based on this content
The resulting margin effects will be more or less visible depending on refineriesrsquo complexity and flexibility Complex refineries could benefit from higher margins if the price of their crude intake drops
MIDDLE EAST RISKSIn the Middle East Washington has turned its back on Iran again leaving more leeway to Russian influence Meanwhile its Saudi ally is unlikely to lift the embargo against Qatar in 2019 also pushing Doha further into the destabilising arms of Turkey and Iran
Turkeyrsquos lira was among the worst currency performers in 2018 and the country still relies heavily on foreign influence As a result increased pressure on the countryrsquos central bank may unwind some of the tightening delivered in the second half of 2018 especially as the March 2019 elections loom
Saudi Arabia still produces some of the cheapest barrels in the world at less than $10bbl but according to the IMF the countryrsquos fiscal break-even price based on its current
Although compliance over the first year is estimated to be around 75 higher refinery runs of at least 400000 bblday will be needed to meet the required move to the new global bunker fuel standard
This is expected to strain the refining system as the production of cleaner and lower-sulphur products will have to replace that of higher-sulphur residual fuel
This may widen differentials between light clean and heavy dirty products even if the penetration of scrubbing technology is expected to progress at scale and partly offset demand for cleaner fuels - at least in the immediate aftermath of the new regulation
A strained refining market will in turn affect the crude oil market as well as product differentials There are expectations in the longer-run that low-sulphur crude may command a stronger premium while discounts for heavy sour grades could potentially widen significantly
Source ICE CME Group
Brent M1-M13Brent M1-M7
$8bbl
RED (or negative) indicates CONTANGO
BLUE (or positive) indicates BACKWARDATION$6bbl
$4bbl
$2bbl
$0bbl
-$2bbl
-$4bbl
-$6bbl
-$8bbl
-$10bbl
111
518
928
18
813
18
626
18
59
18
321
18
21
18
121
317
102
617
98
17
724
17
66
17
419
17
31
17
112
17
112
416
107
16
822
16
75
16
518
16
331
16
211
16
BRENT TERM STRUCTURE(CONTANGOBACKWARDATION)
Source IMF
$0
$20
$40
$60
$80
$100
$120
201920182017201620152014201320122011201020092008
in US dollars per barrel annualised
73
BREAKEVEN FISCAL OIL PRICE FOR SAUDI ARABIA
n Access daily price assessments on 57 key crude grades from the primary information provider to the ICE Brent futures
n Comprehensive crude oil coverage delivered in three daily updates including details on China crude supply and demand data and refinery markets
n Our global experts collate data from a wide range of market players and use a robust methodology to assess it
Find out more
A TRUSTED SOURCE FOR INDEPENDENT EXPERT VIEWS AND DATA ON THE GLOBAL CRUDE OIL MARKET
Copyright 2019 Reed Business Information Ltd ICIS is a member of RBI and is part of RELX Group plc ICIS accepts no liability for commercial decisions based on this content
government expenditure stands in excess of $70bbl This may pledge in favour of additional production cuts in 2019 as the country already hinted to
More worryingly maybe the postponed Saudi Aramcorsquos IPO has epitomised the kingdomrsquos unpredictable foreign policy and highly volatile domestic politics dealing investorsrsquo confidence a serious blow
A new generation of rulers in the Middle East has challenged the time-long model of tenured predictable leadership which is now becoming an exception rather than the rule
Higher prices tend to spur additional production volumes from OPEC but also from non-OPEC countries especially from the US But too high a clearing price could also dent global demand growth
With a higher chance of economic slowdown in 2019 a jolt in prices seems unlikely but on the other hand cheaper oil prices will help sustain demand into the first half of the year
The plan for oil producers is now to gradually return to a backwardated Brent market whereby prompt prices are higher than longer-dated future prices usually in response to tighter supply
Keep up with the latest energy news and insights
Copyright 2019 Reed Business Information Ltd ICIS is a member of RBI and is part of RELX Group plc ICIS accepts no liability for commercial decisions based on this content
Emerging market equities were down 25 between late January 2018 and late November 2018 with a low probability of rebounding in 2019 without more government spending from China (government spending) Global oil demand is forecast to grow by about 129m bblday in 2019 104m bblday of which will come from non-OECD countries according to OPEC
There is strong refined product growth from countries like India Indonesia Singapore and Thailand For the past few years those emerging economies have benefited from high liquidity and tight fiscal policies but the trend is inverting towards looser policies and tighter monetary supply
The run-up in US Treasury yields and appreciation of the dollar hence poses a significant stress test to the global financial system It also means that the cost of borrowing money will increase and that pending higher oil prices some oil fields may not be profitable at $50bbl especially in the US
Given the ample crude supply early into 2019 the oil market may balance at a lower marginal cost of production which means that higher-cost barrels will be priced out of the market
THE US WILDCARDSo far US shale drillers have benefited from cheap money and little oilfield service cost inflation But a tighter monetary market may put some of them under duress in 2019
Markets run on sentiments more than numbers and a rise in recession fears is a stronger risk in 2019 Although trade frictions have now partially been baked into commodity prices investorsrsquo reactions remain unpredictable
Beyond the risk of an unbalanced oil market US oil remains the wild card in 2019 being no party to any supply agreement
US shale drillers have proved more responsive to price swings than big oil but their aggregate response is extremely difficult to gauge since they do not coordinate their supply decisions
Likewise consumption responds to changes in price with a 6 to 18 month lag By the time demand destruction becomes visible it is too late and prices will have risen too much
With prices low enough the US Administration still has a good hand in the game President Donald Trump has backed off on his threats on Iran but he still has the ability to punish and can decide to go harder on the Islamic Republic within the next six months
US Federal Reserve Chairman Jerome Powell recently reasserted its independence after being criticised by the US President In other words even if a pause is US Fed policy rate hikes is probable in the first half of 2019 monetary tightening will persist as the Fed continues to re-purchase bonds and stocks to reduce its balance sheet holdings effectively removing cash from the US economy
THE PREMISES OF IMO 2020The first effects of International Maritime Organisation (IMO) 2020 new sulphur regulation may also start to be visible in 2019 or at least to begin to translate into a number of downstream production patterns
The new IMO 2020 regulation will come into force on 1 January 2020 setting the new global sulphur cap for marine fuels at 05 Sources EIA Russian Ministry of Energy JODI
US production Saudi production Russian production
in million barrels per day12M
11M
10M
9M
8M
7M
6M
5M
101184118
101174117
101164116
101154115
101144114
101134113
101124112
101114111
101104110
10194109
RUSSIAN OIL PRODUCTION VS SAUDI ARABIA AND THE US
Copyright 2019 Reed Business Information Ltd ICIS is a member of RBI and is part of RELX Group plc ICIS accepts no liability for commercial decisions based on this content
The resulting margin effects will be more or less visible depending on refineriesrsquo complexity and flexibility Complex refineries could benefit from higher margins if the price of their crude intake drops
MIDDLE EAST RISKSIn the Middle East Washington has turned its back on Iran again leaving more leeway to Russian influence Meanwhile its Saudi ally is unlikely to lift the embargo against Qatar in 2019 also pushing Doha further into the destabilising arms of Turkey and Iran
Turkeyrsquos lira was among the worst currency performers in 2018 and the country still relies heavily on foreign influence As a result increased pressure on the countryrsquos central bank may unwind some of the tightening delivered in the second half of 2018 especially as the March 2019 elections loom
Saudi Arabia still produces some of the cheapest barrels in the world at less than $10bbl but according to the IMF the countryrsquos fiscal break-even price based on its current
Although compliance over the first year is estimated to be around 75 higher refinery runs of at least 400000 bblday will be needed to meet the required move to the new global bunker fuel standard
This is expected to strain the refining system as the production of cleaner and lower-sulphur products will have to replace that of higher-sulphur residual fuel
This may widen differentials between light clean and heavy dirty products even if the penetration of scrubbing technology is expected to progress at scale and partly offset demand for cleaner fuels - at least in the immediate aftermath of the new regulation
A strained refining market will in turn affect the crude oil market as well as product differentials There are expectations in the longer-run that low-sulphur crude may command a stronger premium while discounts for heavy sour grades could potentially widen significantly
Source ICE CME Group
Brent M1-M13Brent M1-M7
$8bbl
RED (or negative) indicates CONTANGO
BLUE (or positive) indicates BACKWARDATION$6bbl
$4bbl
$2bbl
$0bbl
-$2bbl
-$4bbl
-$6bbl
-$8bbl
-$10bbl
111
518
928
18
813
18
626
18
59
18
321
18
21
18
121
317
102
617
98
17
724
17
66
17
419
17
31
17
112
17
112
416
107
16
822
16
75
16
518
16
331
16
211
16
BRENT TERM STRUCTURE(CONTANGOBACKWARDATION)
Source IMF
$0
$20
$40
$60
$80
$100
$120
201920182017201620152014201320122011201020092008
in US dollars per barrel annualised
73
BREAKEVEN FISCAL OIL PRICE FOR SAUDI ARABIA
n Access daily price assessments on 57 key crude grades from the primary information provider to the ICE Brent futures
n Comprehensive crude oil coverage delivered in three daily updates including details on China crude supply and demand data and refinery markets
n Our global experts collate data from a wide range of market players and use a robust methodology to assess it
Find out more
A TRUSTED SOURCE FOR INDEPENDENT EXPERT VIEWS AND DATA ON THE GLOBAL CRUDE OIL MARKET
Copyright 2019 Reed Business Information Ltd ICIS is a member of RBI and is part of RELX Group plc ICIS accepts no liability for commercial decisions based on this content
government expenditure stands in excess of $70bbl This may pledge in favour of additional production cuts in 2019 as the country already hinted to
More worryingly maybe the postponed Saudi Aramcorsquos IPO has epitomised the kingdomrsquos unpredictable foreign policy and highly volatile domestic politics dealing investorsrsquo confidence a serious blow
A new generation of rulers in the Middle East has challenged the time-long model of tenured predictable leadership which is now becoming an exception rather than the rule
Higher prices tend to spur additional production volumes from OPEC but also from non-OPEC countries especially from the US But too high a clearing price could also dent global demand growth
With a higher chance of economic slowdown in 2019 a jolt in prices seems unlikely but on the other hand cheaper oil prices will help sustain demand into the first half of the year
The plan for oil producers is now to gradually return to a backwardated Brent market whereby prompt prices are higher than longer-dated future prices usually in response to tighter supply
Keep up with the latest energy news and insights
Copyright 2019 Reed Business Information Ltd ICIS is a member of RBI and is part of RELX Group plc ICIS accepts no liability for commercial decisions based on this content
The resulting margin effects will be more or less visible depending on refineriesrsquo complexity and flexibility Complex refineries could benefit from higher margins if the price of their crude intake drops
MIDDLE EAST RISKSIn the Middle East Washington has turned its back on Iran again leaving more leeway to Russian influence Meanwhile its Saudi ally is unlikely to lift the embargo against Qatar in 2019 also pushing Doha further into the destabilising arms of Turkey and Iran
Turkeyrsquos lira was among the worst currency performers in 2018 and the country still relies heavily on foreign influence As a result increased pressure on the countryrsquos central bank may unwind some of the tightening delivered in the second half of 2018 especially as the March 2019 elections loom
Saudi Arabia still produces some of the cheapest barrels in the world at less than $10bbl but according to the IMF the countryrsquos fiscal break-even price based on its current
Although compliance over the first year is estimated to be around 75 higher refinery runs of at least 400000 bblday will be needed to meet the required move to the new global bunker fuel standard
This is expected to strain the refining system as the production of cleaner and lower-sulphur products will have to replace that of higher-sulphur residual fuel
This may widen differentials between light clean and heavy dirty products even if the penetration of scrubbing technology is expected to progress at scale and partly offset demand for cleaner fuels - at least in the immediate aftermath of the new regulation
A strained refining market will in turn affect the crude oil market as well as product differentials There are expectations in the longer-run that low-sulphur crude may command a stronger premium while discounts for heavy sour grades could potentially widen significantly
Source ICE CME Group
Brent M1-M13Brent M1-M7
$8bbl
RED (or negative) indicates CONTANGO
BLUE (or positive) indicates BACKWARDATION$6bbl
$4bbl
$2bbl
$0bbl
-$2bbl
-$4bbl
-$6bbl
-$8bbl
-$10bbl
111
518
928
18
813
18
626
18
59
18
321
18
21
18
121
317
102
617
98
17
724
17
66
17
419
17
31
17
112
17
112
416
107
16
822
16
75
16
518
16
331
16
211
16
BRENT TERM STRUCTURE(CONTANGOBACKWARDATION)
Source IMF
$0
$20
$40
$60
$80
$100
$120
201920182017201620152014201320122011201020092008
in US dollars per barrel annualised
73
BREAKEVEN FISCAL OIL PRICE FOR SAUDI ARABIA
n Access daily price assessments on 57 key crude grades from the primary information provider to the ICE Brent futures
n Comprehensive crude oil coverage delivered in three daily updates including details on China crude supply and demand data and refinery markets
n Our global experts collate data from a wide range of market players and use a robust methodology to assess it
Find out more
A TRUSTED SOURCE FOR INDEPENDENT EXPERT VIEWS AND DATA ON THE GLOBAL CRUDE OIL MARKET
Copyright 2019 Reed Business Information Ltd ICIS is a member of RBI and is part of RELX Group plc ICIS accepts no liability for commercial decisions based on this content
government expenditure stands in excess of $70bbl This may pledge in favour of additional production cuts in 2019 as the country already hinted to
More worryingly maybe the postponed Saudi Aramcorsquos IPO has epitomised the kingdomrsquos unpredictable foreign policy and highly volatile domestic politics dealing investorsrsquo confidence a serious blow
A new generation of rulers in the Middle East has challenged the time-long model of tenured predictable leadership which is now becoming an exception rather than the rule
Higher prices tend to spur additional production volumes from OPEC but also from non-OPEC countries especially from the US But too high a clearing price could also dent global demand growth
With a higher chance of economic slowdown in 2019 a jolt in prices seems unlikely but on the other hand cheaper oil prices will help sustain demand into the first half of the year
The plan for oil producers is now to gradually return to a backwardated Brent market whereby prompt prices are higher than longer-dated future prices usually in response to tighter supply
Keep up with the latest energy news and insights
Copyright 2019 Reed Business Information Ltd ICIS is a member of RBI and is part of RELX Group plc ICIS accepts no liability for commercial decisions based on this content
government expenditure stands in excess of $70bbl This may pledge in favour of additional production cuts in 2019 as the country already hinted to
More worryingly maybe the postponed Saudi Aramcorsquos IPO has epitomised the kingdomrsquos unpredictable foreign policy and highly volatile domestic politics dealing investorsrsquo confidence a serious blow
A new generation of rulers in the Middle East has challenged the time-long model of tenured predictable leadership which is now becoming an exception rather than the rule
Higher prices tend to spur additional production volumes from OPEC but also from non-OPEC countries especially from the US But too high a clearing price could also dent global demand growth
With a higher chance of economic slowdown in 2019 a jolt in prices seems unlikely but on the other hand cheaper oil prices will help sustain demand into the first half of the year
The plan for oil producers is now to gradually return to a backwardated Brent market whereby prompt prices are higher than longer-dated future prices usually in response to tighter supply
Keep up with the latest energy news and insights