What are your production and consumption estimates for Brent crude oil in 2020?
Economic stabilisation is firming up globally, although the situation remains delicate. The US economy’s momentum is no longer at risk, as recent interest rate cuts have stimulated activity in the housing sector, and this will have positive spill over effect in other sectors. Germany and Europe have barely dodged a recession and confidence is now starting to pick up with car sales and exports on the mend. China and India will remain key as the biggest drivers of demand growth and we could see global oil demand growth tick up marginally in 2020 from around 1 million b/d this year.
Growth in India, which is a major oil consumer, is also slowing. What is the likely impact on the oil market over the next 12 months?
With weakened demand caused by an economic slowdown, a slump in new vehicle sales, and flooding during monsoon season, India’s oil demand growth number may be just 120,000 b/d in 2019. This would be its weakest since 2013. Diesel has been hardest hit by the slowdown, prompting refiners to search for buyers of their surplus supply in overseas markets.
However, S&P Global Platts sees India’s oil demand growing by 170,000 b/d next year as economic growth is expected to pick up helped by the Reserve Bank of India’s (RBI’s) interest rate cuts. An improving macroeconomic situation should be weighed against motorists paying a premium for their transport fuel with news rules coming in in April.
Do you see OPEC change is stance anytime soon? Can the production cuts get deeper in 2020?
In the immediate term, it will be interesting to see whether OPEC and its non-OPEC allies, including Russia, make good on their commitment to the new production cut deal. There is likely to be an oil surplus regardless of the deeper cuts and market balancing may take a little longer to achieve. A lot will depend on non-OPEC supply growth, in particular US shale. Strong US production along with uncertainties over increased supply in Brazil and the arrival of the new North Sea grade Johan Sverdrup which is bringing 440,000 b/d in medium sour crude to the market (similar in quality to what OPEC is cutting) will also be important in determining how oversupplied the market will be in the first half of 2020.
That said, one should note that US shale is lighter sweeter crude. So while it is of premium quality, refiners also need heavier and sourer crude grades which is in shorter supply due to OPEC cuts and losses from Venezuela and Iran. The spread between light sweet crudes and heavy sour ones has become an important dynamic in the market amid the rise of US shale and the OPEC+ deal over the past few years and will shape supply and demand fundamentals going forward.
How is the oil market viewing the forecast of slower global growth, geopolitical situation and trade war fears?
There is plenty of uncertainty in the market including sanctions risks, tanker troubles in the West Asia and geopolitical risk after the attack on Saudi Arabia oil facilities in September, which knocked out half of its production – or about 5 per cent of global output – before they were restored by the end of the month. However, if you look at it from a supply and demand angle, many of these supply risks failed to sustainably move the dial on oil prices partly because the market is so well stocked. If balances tighten in the latter half of 2020, then these geopolitical factors will become a different proposition and the notion of risk premium may be something more meaningful.
International maritime Organisation (IMO) norms kick-in barely a month from now. How prepared is the global oil market for this?
IMO 2020 is effectively here but not yet fully reflected in prices. High sulphur fuel oil price cracks have collapsed globally and will remain low and likely volatile through the first half of 2020 before trending back. Diesel cracks are still subdued but will dramatically strengthen with a peak in the first half of next year driven by much tighter supply-demand balances. Sweet crudes are trading at a premium, especially in Asia, where simple refiners are switching from sour. However, with the increase in complex refinery runs, heavy sour Dubai-based grades remain in demand on tightening availability, especially following the OPEC+ cuts.
With Saudi Aramco’s listing out of the way, do you think oil prices could soften a bit purely on sentiment?
Saudi Aramco’s IPO from an oil price perspective should be placed into context of whether the Saudi Arabia government is prepared to cede market share for better prices and the relationship it has with Russia and the other OPEC producers. Oil prices, at the end of the day, come back to supply and demand and Aramco will still be operating as a National Oil Company.
What about shale gas?
The range of views on US shale production for 2020 is very broad, with S&P Global Platts analysts talking of just 100,000 b/d growth. Producers are struggling to generate the returns for investors at current prices of WTI. But with fewer pipeline constraints, the opportunity to supply more is there if it can be matched by appetite. Then there is Libya which remains a tinderbox, given the political tension between rival factions there. While oil production has been on a steady upward path well in excess of 1 million b/d now, the risks were highlighted recently with the outages at the El Feel oil field. On the demand side, the trade dispute between the US and China continues to cast a shadow over global trade.