Oil demand growth concerns threaten to overshadow supply cuts

THE oil sector has witnessed a series of developments in early 2019 that have clouded demand prospects and have sent out a signal to the market that the recovery in prices could be at a pace slower than expected earlier.

Fears are rising over slowing economic growth in Europe, the US and China. That may potentially overshadow any potential disruption to supplies because of two key factors – the impact that Washington’s decision to impose sanctions on Venezuelan oil might have on trade flows, and secondly, if the US turns down requests to extend waivers on Iranian oil.

But market participants have been largely unanimous on one theme.

While economic growth concerns may slow the speed of a recovery in oil prices, the fall in Opec’s output to four-year lows – thanks to a late 2018 deal with non-Opec countries – is likely to prevent a sharp slide in prices.

To sum up, while the rise in prices might be slow in the first quarter, the scope for a slide in prices may be limited.

S&P Global Platts Analytics expects dated Brent prices to hover around US$60 per barrel in the first quarter of 2019.

However, that range will be still well below the near 4-year high prices of US$86.74 per barrel the market witnessed on Oct 3, 2018, before crashing more than 40% to fall below US$50 per barrel in late December.

According to an S&P Global Platts survey, Opec in January pumped the lowest volume since March 2015, with crude oil production sharply falling to 30.86 million barrels per day, down 970,000 barrels per day from December.

The month-on-month fall was the biggest since December 2016. The 11 Opec members achieved 76% of their required cuts in January, with their production falling 619,000 barrels per day from October, the benchmark month from which the quotas were determined, except for Kuwait, which is using November.

On the macroeconomic outlook front, S&P Global Ratings expects global GDP growth to slow in 2018, led by the United States. Chinese growth will moderate. Europe’s growth will remain relatively low and stable. But it has added that slowing growth does not mean it’s the beginning of another global financial crisis.

Bank of England governor Mark Carney has, however, warned recently that the UK faces a 25% chance of recession this year and that the risk of a recession would be increased by a no-deal Brexit.

US sanctions on Venezuela’s stateowned Petroleos de Venezuela SA (PDVSA) are expected to affect crude markets in Asia as the South American country could be forced to redirect nearly half of its exports away from the US, its single largest customer.

PDVSA’s Asian customers, such as private Indian refiners Reliance and Nayara Energy, and Chinese independents, are expected to show interest for around 500,000 barrels per day of Venezuelan heavy crudes, to replace Iranian grades.

The sanctions could also boost competition for heavy crudes from the Middle East, such as Iraq’s Basrah Heavy, Bahrain’s Banoco Arab Medium and Saudi Arab Heavy. However, if Middle Eastern producers choose to trim their allotments to Asia and boost supply to the US, the market will tighten.

It won’t be easy for PDVSA to redirect all its displaced volumes to Asia, where oil refineries are configured to process mostly medium sour grades from the Middle East. In addition, only a few refineries actively seek heavy grades on the spot market.

PDVSA’s crude exports were around 1.28 million barrels per day in fourth quarter of 2018, with the US taking in more than 40% of those exports, India nearly 20% and China about 22%.

While the sanctions have yet to affect global oil prices significantly, that could change if the crisis in Venezuela drags on.

Another big question hanging over the market is whether the US will agree to a second round of waivers for importing nations to continue buying Iranian oil.

A US special representative for Iran said recently that Iran’s oil customers should not expect new waivers to the US sanctions in May.

Many market participants, however, still expect the US to grant fresh waivers when the current exemptions expire in May. Oil prices will largely determine the extent of those waivers.

Iranian crude imports by South Korea, Japan and India have been slashed at least by half from levels before November, when the US re-imposed sanctions on Iran’s oil trade, according to S&P Global Platts calculations.

Platts Analytics expects Iran’s oil exports to average 1.2 million barrels per day over January-April and fall to 860,000 barrels per day by fourth quarter of 2019, compared with about 2.7 million barrels per day in early 2018.

Markets will be also be closely watching another development in February.

Expectations are also growing that Opec, after failing to close a deal last year, will try again this month to iron out a permanent pact with Russia and nine other key nonOpec allies to manage the oil market and stabilise prices.

Opec members will confer on Feb 18-19 to finalise a draft charter and then present it to the non-Opec partners on Feb 22. The goal is to ratify the charter at the next full meeting of the coalition of Opec and nonOpec members over April 17-18 in Vienna.

Although, the intensifying political crisis in Venezuela may complicate the plans, markets will be closely watching developments to get some signals on the direction for oil prices.