Trade tensions steer oil market, but sanctions push prices
Kuwait crude price gains 2.7% to average at $58.7/b
KUWAIT: Oil prices were on an uptrend in the new year after bottoming in December-19 with Brent and OPEC crude grades witnessing strong and consistent gains. However, the momentum soon faded after three weeks of gains and almost flattened with crude hovering above the $60/b mark during the first two weeks of February-19. The initial surge came amid a broad-based rally in almost all global markets and a majority of the asset classes globally.
Oil prices particularly got support from the US sanctions on Venezuela that is expected to affect 0.5mb/d in crude exports from the OPEC member. The news of sanctions overshadowed rising production in the US and supported oil prices in a market which continues to doubt near term demand. That said, supply continued unabated from the US as it pumps crude at record pace denting the support that came after the OPEC+ countries implemented the cuts this year.
On the economic front, all eyes were on the looming deadline for the imposition of US tariffs on China at the start of next month as trade talks between the two trading partners are yet to see any announced resolution. Demand prospects for the oil market got a further blow when economic growth rates for the European region were slashed by the European Commission for the years 2019 and 2020. The report highlighted the ongoing trade tensions between the US and China and domestic challenges in some of the biggest European economies including Germany, France and Italy as factors affecting economic growth.
Moreover, the greenback traded at a three month high that made crude costlier for oil importers while confusion over a repeat of US government shut down added to the pressure on oil prices which was later avoided after a tentative deal. On the other hand, key indicators from China were disappointing over the past few months. Positives on the demand side included an increase in demand for distillates in the US due to the extreme cold weather.
The story on the supply side continues to haunt the market indicating strict limits to any rally in oil prices beyond the current range. The US produced at a historical high level of 11.9 mb/d while inventories remained at more than 12-month high levels on the back of refinery outages at Cushing. US oil rig count went up for the second time in three weeks, although the trend looks flattening or even declining since the recent peak in late last year. On the other hand, Canada has also placed temporary curbs on production due to pipeline capacity constraints as well as a recent crude pipeline leak incident in Illinois, US.
OPEC oil production receded during January-19 after the implementation of the OPEC+ agreement. A Reuters report said that production during the month saw a steep decline as Saudi Arabia and its allies in the Gulf region over-delivered on their share of production cuts. On the other hand, production in Iran and Venezuela declined following US sanctions, while Libya continued to face weather conditions that disrupted the country’s production.
Oil Prices
After two consecutive months of double digit declines, average OPEC crude prices gained 3.2 percent during January-19 to reach $58.74/b. Kuwait crude average price also gained but at a slightly smaller pace of 2.7 percent to average at $58.7/b. On the other hand, average Brent crude witnessed the biggest gain of the three crude grades during January-19 with its price up 4.2 percent to average at $59.4/b. Oil prices rallied during first few weeks of the year which saw OPEC crude peaking at $62.32/b with a surge of 21 percent from last years close.
However, the momentum gradually flattened during the second week of February-19 led by reports of record production in the US, rising inventories and the slow progress related to trade talks between the US and China. Analyst consensus estimates for the near term also suggests marginal recovery in oil prices with the median prices at $63.0/b for Q1-19 that is expected to gradually increase to $70.0/b by the end of the year. Also, there was a deterioration in consensus numbers as compared to January-19 estimates with marginal decline in expectations for price expectations for the first two quarters of the year. According to the latest EIA report, crude inventories in the US rose by 1.3 mb/d during the week ended 1-February-19. The data was in line considering record output in the US as well as rising oil rig count.
The agency also published its Short Term Energy Outlook in which it raised US oil production forecast for 2019 by 2.8 percent to 12.41 mb/d as well as for 2020 by 2.6 percent to 13.2 mb/d. Oil price outlook for 2019 was raised marginally by 0.8 percent to $61.03/b for Brent crude while 2020 price outlook for the crude grade saw a bigger cut of 4.3 percent to $62/b. The weekly rig count data from Baker Hughes also concurred with the rise in production in the US. According to the latest report, 7 additional rigs came online leading to a total of 854 working rigs. This was the second increase in the last three weeks as drillers expand production eyeing rising oil prices.
World oil demand
After keeping it constant in the previous two months, world oil demand growth estimates for 2018 was lowered in the latest OPEC monthly report. According to the new estimates, world oil demand grew by 1.47 mb/d in 2018, a revision of 0.03 mb/d as compared to the previous estimates. Total demand is now expected to reach 98.76 mb/d after demand growth was slower-than-expected for OECD Europe, OECD Asia Pacific, Other Asia, Latin Americas and the Middle East during the last two quarters of 2018. Overall demand for the OECD countries was lowered by 0.1 mb/d. Demand estimates for the OECD Americas region was raised for Q4-18 led by better-than-expected demand for light and middle distillates and from the petrochemical and industrial sectors in the US resulting in a revision of 0.1 mb/d for Q4-18 demand figure for the country. For the OECD Europe region, demand growth estimates were lowered by 0.02 mb/d for 2018 due to slower-than-expected demand especially during 2H-18 led by lagging economic activity, a decrease in petrochemical feedstock requirements and warmer weather conditions during Q4-18.
In the OECD Asia Pacific region, lower-thanexpected demand in South Korea’s petrochemical sector in Q4-18 led to a downward revision of 0.01 mb/d for the full year. Non-OECD demand estimates were also lowered by around 0.02 mb/d primarily due to a downward revision of 0.03 mb/d in Q4-18 demand numbers for India led by lower-thanexpected demand in November-18. The Middle East region also underwent a downward revision of 0.01 mb/d primarily reflecting lower demand from Saudi Arabia due to substitution effects, economic reform plans and subsidy reductions. World oil demand growth expectations for 2019 saw a bigger downward revision of 0.05 mb/d with demand now expected to grow by 1.24 mb/d to average at 100.00 mb/d for the year. The revision reflected an expected decline in economic growth in 2019 for some of the key global economies.
OECD oil demand was revised down by 0.02 mb/d due to lower expected growth rate in OECD Americas during Q1-19 and OECD Europe for the full year. For the non-OECD countries, demand was lowered by 0.01 mb/d and 0.02 mb/d for Latin America and the Middle East regions, respectively.
World oil supply According to preliminary data, global oil supply declined for the second consecutive month during January-19. Supply went below the 100 mb/d mark for the first time since November-18 to reach 99.32 mb/d in January-19 led by a decline in non-OPEC supply to the tune of 0.23 mb/d to average at 68.52 mb/d primarily led by Canada, FSU and China along with a decline of 0.8 mb/d for the OPEC countries to reach 30.81 mb/d. OPEC’s share of global crude production reached 31.0 percent in January-19, a decline of 50 bps as compared to the previous month.
Non-OPEC supply growth projections for 2018 was once again revised upward by 0.11 mb/d and is now expected to grow by 2.72 mb/d during the year to average at 62.17 mb/d. The revision reflected higher estimated supply from the US, Canada, Malaysia, China and the UK mainly during the last quarter of 2018 that was partially offset by a downward revision of 8 tb/d for supply estimates for Mexico and India. Supplies from the OECD countries were raised by 76tb/d from the previous esitmates and are now estimated to have averaged at 28.11 mb/d in 2018. Of this, OECD Americas saw an upward revision of 66 tb/d of which Canada’s supply estimates were raised by 35 tb/d, while OECD Europe numbers were revised up by 11 tb/d.
Non-OPEC supply growth forecasts for 2019 was also revised upwards by 0.08 mb/d to 2.18 mb/d and supply is now expected to average at 64.34 mb/d. The upward revision primarily reflected updated production forecast for the US Gulf of Mexico following which US liquids supply forecast was revised upwards by 94 tb/d to an average of 18.44 mb/d.
OPEC oil production & spare capacity OPEC crude production, which now excludes Qatar, witnessed a steep decline during Jan-19 as the OPEC+ agreement was implemented by the producers. According to Bloomberg, production declined by 0.93 mb/d to reach 31.02 mb/d while OPEC secondary estimates put the decline at 0.8 mb/d to average at 30.8 mb/d. Saudi Arabia reported the biggest decline in production by 0.45 mb/d to average at 10.2 mb/d during January-19.
Almost all the OPEC members reported a decline in output during the month. According to Reuters, some of the OPEC members took a bigger share of the cuts that resulted in a compliance level of 70 percent to the new OPEC+ agreement. In an interview, Saudi Arabia’s Energy Minister said that the Kingdom plans to lower oil production to around 9.8 mb/d by March-19. It was also reported that Russia, which produced at a record pace in 2018, is yet to fully comply with the allocated production cuts and as a result it is affecting the compliance levels for the overall group. However, the producer is expected to gradually raise its compliance levels in the coming months as the Energy Minister said the country plans to cut 90-100 tb/d in Feb-19 as compared to Oct-18 levels.
Meanwhile, oil production in Libya was for the first time in five months reported below the 1 mb/d mark during January-19, to reach 0.9 mb/d as the country initially faced weather related issues that was followed by production disruptions at the country’s largest oilfield. According to recent updates, the country’s El Sharara oilfield, which produces at around 350 tb/d is ready to resume production. Oil production also declined in Nigeria during January19 led by pipeline shutdown due to leakages as well as maintenance.
Oil production in Venezuela continued to remains subdued and with the recent sanctions from the US, the country is looking for buyers of its crude elsewhere. According to a report, Venezuela has turned to India, its second largest buyer after US, to double its sales from the current 0.3 mb/d.
KAMCO Research believes that the current level of prices adequately represents the supply/demand situation in the market. Positive factors continue to remain fragile as the market tightening is temporary even after considering the OPEC+ cuts as exempt producers have the potential to significantly dent the efforts.