Oil prices post gain in 3 years in 2019 on improving demand outlook
US-China trade dispute, Iran sanctions compound market volatility
KUWAIT: Oil prices closed 2019 with the biggest gain in three years with an increase of 34 percent to close the year at $67.77/b for Brent crude. The surge came primarily on the back of hopes of better economic outlook as US and China inched closer to a trade deal. The rally was also seen in the broader commodity universe with the corresponding index up 6 percent during the year, as almost all major commodity indices witnessed gains during the year, barring Natural Gas that witnessed a steep decline of more than 25 percent.
In addition, the continued production curbs from the OPEC+ members during the year combined with the decline in production from Iran following the sanctions imposed by the US, supported oil prices. On the other hand, geopolitical issues in the region and the attacks on Saudi Arabia’s oil facility further added to price volatility during the year.
The year 2020 started with oil prices climbing almost 4 percent during the first three trading sessions and regaining the $70/b mark after almost eight months following attacks in Iran. However, the prices trended downwards as tensions eased, falling almost 9 percent from this year’s peak. The decline also came due to an unexpected rise in crude inventories in the US during the week ended 3-Jan2020 with gasoline stocks increasing the most in a week in four years, according to data from the EIA.
The demand for gasoline in the US has remained weak recently and this translated into higher inventories at the start of the year. Nevertheless, inventory data for the week ended 10-Jan-2020 showed a decline of 2.5 million barrels, although gasoline inventories continued to rise adding 6.7 million barrels during the week.
On the supply side, the year started with US crude production reaching a record high of 13 mb/d, according to EIA. The report also said that OECD inventories stood at 9 million barrels above the five-year average, a key industry gauge. Another report showed that Norway’s oil production reached a 9-year high level after the country started the Johan Sverdrup oilfield in the North Sea that produced at 350 tb/d and pushed the country’s production to 1.76 mb/d.
Production by OPEC producers declined slightly during December-19 as compared to November-19 and stood at around 29.6 mb/d. The decline in production by Saudi Arabia, Iraq and UAE during the month was partially offset by higher production in Angola. Speculations surrounding OPEC+ extending the current deadline of production cuts till the end of the year have already started doing rounds although the level of cooperation and compliance by non-OPEC members is yet to be determined. IEA’s monthly report showed a compliance level of 142 percent for the OPEC+ group with overcompliance coming solely from OPEC producers with its compliance level at 181 percent, whereas non-OPEC producers produced with a compliance level of 59 percent. The IEA forecast an increase of 100 tb/d in supplies from non-OPEC members in 2020 and said that oversupplies from non-OPEC producers would be adequate to sustain geopolitical shocks to oil prices.
Oil prices decline
Crude oil price rose for almost all the crude grades during 2019 with Brent recording a gain of 34 percent to reach $67.77/b, whereas OPEC crude increased by 32 percent during the year to close at $68.0/b. However, the gain failed to reflect the volatility in prices during the year with a high of $74.94/b for Brent crude and a yearly low of $53.23/b. The average crude price during the year also showed stark difference from the year-end prices. Brent crude averaged at $64.3/b during the year as compared to $71.3/b in 2018, recording a y-o-y decline of 10 percent.
Similarly, OPEC crude averaged at a slightly lower $64.0/b in 2019, a decline of 8.1 percent as compared to $69.7/b in 2018. Kuwait crude grade reported a relatively smaller decline in average prices at 6.7 percent with prices averaging at $64.4/b in 2019 as compared to $69.1/b in 2018.
Prices during the year were clearly swayed by talks around US-China trade dispute that impacted expected demand for crude globally. Other factors that affected prices included US crude production levels that reached record levels, sanctions on Iran and Venezuela, the extension to OPEC+ agreement that increased the cuts to 2.1 mb/d and the geopolitical tensions in the Middle East that got exacerbated by the attacks on Saudi Arabia’s oil facilities in September-19. A majority of the agencies predicted a slowdown in global economy in the near term primarily due to the slowdown in global trade owing to the trade dispute. However, the signing of the deal at the start of 2020 brought some relief to the oil market. The announcement of the deal paused the imposition of additional tariffs by the US on Chinese imports. However, as per the deal, China has to import an additional $200 billion worth of goods and services from the US over the next two years as compared to $185 billion imports in 2017, the base year for the comparison. This implies that total exports to China from the US should reach $260 billion in 2020 and further to $310 billion in 2021, which according to consensus is challenging. In exchange, the US has agreed to lower tariffs on $120 billion worth of imports from China from 15 percent to 7.5 percent.
Meanwhile, work on a Phase Two deal has already begun with the US expected to impose further restriction on subsidies granted by Chinese government to its local businesses. On the supply side, the extension of the production cut agreement by OPEC+ countries and the over compliance by OPEC producers, especially Saudi Arabia, supported prices during the year. The Kingdom produced at an average rate of 9.8 mb/d as against previous year average production of 10.3 mb/d. On the other hand, the sanction-led decline in production in Iran and Venezuela and the continued disruption in Libya and Nigeria also led to higher prices. The average production for OPEC members, excluding Gabon and Equatorial Guinea stood at 29.33 m/d in 2019, the lowest production level by the group since 2011 and a decline of 2 mb/d as compared to 2018.
Oil prices
Crude prices started 2020 on a positive note with an increase of 4.3 percent during the first three trading sessions to breach the $70/b mark for the first time in almost eight months and to reach $70.9/b. However, an unexpected crude inventory build in the US led to fall in prices in the subsequent trading sessions pushing prices to a 5-week low of $65.3/b for the OPEC basket by 16January-2020.
The decline came despite the US announcing the signing of a Phase One trade deal with China that came as relief for the trade war that has lasted for almost two years. The response to the trade deal was muted, as finer details of the deal showed a number of challenges in the successful implementation over the next two years. In addition, the preliminary details of a Phase Two deal also shows further pressure on China from the US in exchange for relaxation of tariffs. Average monthly crude prices rose for the second consecutive month during December-2019 with OPEC crude averaging at $66.5/b with an increase of 5.6 percent, the biggest m-o-m increase since April-19. Average Brent crude prices also increased at a slightly higher pace of 6.0 percent to reach $66.9/b, while Kuwait crude increased by 4.0 percent to average at $66.3/b in December-19.
The latest monthly report from the IEA downplayed the prospects of a declining oil glut in the near term. The report said that the growth in non-OPEC output, including that in the US, would offset a growth in demand in the near term as well as any shortage of supplies arising out of geopolitical issues. On oil demand in 2020, the agency said that global demand will grow by 1.2 mb/d in 2020, unchanged from its last report, on the back of lower prices and higher global GDP growth, as trade disputes are settled. On the other hand, a number of reports pointed to a steeper decline in shale output in the US next year led by capital discipline by drillers as well as declining well productivity. Some reports have even pointed to the Permian Basin reaching peak production. In its latest quarterly filing, Schlumberger said that US output is expected to slow over the next five years that could lead to consolidation in the shale industry.
World oil demand
World oil demand growth estimates for 2019 was revised downward by 0.05 mb/d to an average of 0.93 mb/d with demand estimated to have reached 99.77 mb/d. The revision reflected a decline in demand in the OECD Americas and Asia Pacific regions that was partially offset by higher Q4-19 demand from the Middle East region. The OECD Americas region saw lower demand for middle distillates during 1H-19 led by a y-o-y fall in manufacturing and trucking activities. Preliminary data until December-19 for the US showed that oil demand increased by approximately 0.2 mb/d or 0.8 percent as compared to 2018, as higher demand for jet kerosene was partially offset by sluggish demand for gasoline due to increasing fuel efficiencies, fuel substitution and changing driving patterns.
World oil supply According to preliminary data, world oil supply witnessed a m-o-m decline of 0.06 mb/d during December19 and averaged at 100.28 mb/d. The increase in production came primarily on the back of higher production in the UK, Norway, Canada, Mexico and the US. Meanwhile, OPEC’s market share declined by 10 bps m-o-m to 29.4 percent during December-19. For the full year 2019, non-OPEC oil supply growth forecast was revised upwards by 0.04 mb/d to an expected growth of 1.86 mb/d with total supply expected to average at 64.34 mb/d. The revision primarily reflected higher US liquids output growth that was revised up by 46 tb/d to a growth of 1.66 mb/d for the year. Supply estimates were also increased for Norway by 21 tb/d and for Russia and Bahrain by 10 tb/d each that was partially offset by downward revisions to supply estimates for the UK (- 21 tb/d), Ghana (-15 tb/d), Qatar and India.
OPEC oil production & spare capacity OPEC crude oil production continued to decline during December-19 reaching a 3-month low of 29.55 mb/d, a decline of 90 tb/d as compared to the last month’s 29.64 mb/d, according to data from Bloomberg. The decline came primarily as the top three OPEC producers Saudi Arabia, Iraq and the UAE scaled back production by an aggregate 160 tb/d. Production in Iran remained almost flat at 2.1 mb/d during December-19.
During December-19, talks were finalized between Saudi Arabia and Kuwait on restarting production in the Neutral Zone shared by the two producers. According to reports, the oilfield is expected to reach full production level of 0.5 mb/d in 12 months. The two countries asserted that the increase in output would not affect their share of the quota as per the OPEC+ agreement. Oil production in Libya has remained volatile over the past few weeks due to disruptions. According to the latest reports, production at the Sharara and El-Feel oilfields were reduced affecting production by around 0.8 mb/d following a shutdown of an export pipeline. Production in Iraq was also affected after a recent temporary stoppage of work on the Al Ahdab field due to political unrest that could spread to a second production site at the Badra field, according to Bloomberg. The two oil fields produce at 120 tb/d.