Geopolitical fears, oversupply cloud 2018 global oil market
The differentials (of both benchmarks) averaged US$6, but have been around US$10 for much of the year. Steve Wood, Moody’s Investors Service Corporate Finance Group managing director
KUALA LUMPUR: Ongoing geopolitical fears, as well as global demand and oversupply issues continued to clout the mercurial nature of the oil and gas (O&G) industry in 2018, with Brent crude, an international benchmark for crude oil prices, averaging above US$70 per barrel against US$54.22 last year.
Crude oil prices were generally higher throughout 2018, riding on supply concerns to influence price movement, while geopolitical risks with developments in Iran, Venezuela and the Middle East, weighing on such narratives.
Moody’s Investors Service Corporate Finance Group managing director Steve Wood pointedoutthatBrenthadaveraged US$72 per barrel year-to-date, with West Texas Intermediate (WTI) at US$66.
“The differentials ( of both benchmarks) averaged US$6, but have been around US$10 for much of the year.
“The higher differentials reflect infrastructure constraints in North America, especially the Permian Basin in Texas and in Canada,” he told Bernama in an email interview.
However, the Energy Information Administration (EIA) expects global oil consumption to grow 1.5 million barrel per day ( bpd) this year, which is reasonable, he explained.
All in all, Wood said the industry continued to recover from the oil price collapse of 2015-2016 as prices have been higher than what the market anticipated at the beginning of the year, hence, fuelling more optimism on the part of both companies and investors.
However, prices remained volatile as Brent ranged between US$58 and US$86 per barrel.
Equity markets too have pressured upstream companies for greater capital discipline to generate free cash flow and to return money to shareholders.
“The oilfield services sector has not improved as quickly as in previous recoveries and this part of the industry continues to be quite weak.
“There has been increased consolidation and simplification among US midstream companies’ corporate structures,” Wood said.
Meanwhile, Brent crude touched US$80 per barrel on May 17, the highest level since November 2014, on concerns of falling Iranian exports following sanction threats as President Donald Trump’s decided to withdraw from an international nuclear deal with Tehran.
Crude oil prices continued to be volatile with Brent hitting US$86 per barrel in early October on supply concerns following implementation of Iranian sanctions.
The International Energy Agency (IEA) had in its report published in August revealed that a US plan to impose targeted crude sanctions against Iran could significantly impact global supply and exhaust the world’s spare oil capacity cushion.
The Paris-based organisation said, as oil sanctions against Iran took effect, possibly in combination with production problems elsewhere, maintaining global supply might be very challenging and would come at the expense of maintaining an adequate spare capacity cushion.
Iran, a member of the Organisation of the Petroleum Exporting Countries ( OPEC), produces around four per cent of global oil supplies, or about 2.4 million bpd.
“The biggest question with the sanctions is how well will it is implemented and enforced.
“While the sanctions went into effect as planned, the Trump administration gave temporary waivers to eight countries.
“The sanctions’ impact on oil markets will depend on what happens when these waivers expire,” said Wood.
Using the WTI as the benchmark, the ratings agency projected yearend prices to be at US$69.10 a barrel and US$67.20 for 2019.
Back home, Bank Islam Malaysia Bhd Chief Economist Dr Mohd Afzanizam Abdul Rashid said the market saw commendable results from national oil company Petronas, with revenue and profit before tax up 19 per cent and 26 per cent to RM63.9 billion and RM18.9 billion respectively, in the third quarter of 2018.
This has benefited local companies, especially those operating their business in the upstream sector, as Petronas is likely to lift its capital expenditure, albeit very cautiously.
In its recently published Petronas Activity Outlook for 2019 to 2021, the national oil firm has raised its assumed oil price on a planning basis to between US$60 and US$70 per barrel for 2019.
“So all in all, 2018 was a good year for the O&G industry,” Mohd Afzanizam said.
The oil market was under pressure in October, along with the stock markets, as trade tensions and concerns over rising interest rates weighed on it.
Oil prices fell to a one-year low on Nov 12, deepening a rout that has plunged the energy complex into a bear market, as growing supplies are poised to swamp demand next year, with Brent crude reaching US$65.84 per barrel.
The drop came after Trump urged OPEC and Saudi Arabia to maintain their current policy of gradually increasing output, which helped cap oil prices.
Bank Islam’s Mohd Afzanizam noted that the trend of lower crude oil prices due to overproduction had raised the amount of risks to the Malaysian government finances due to the cyclical nature of oil prices.
“Such dynamics are difficult to account for with a high degree of precision.
“Therefore, the most sensible thing to do is to have clear plans for diversification in revenue source and at the same time, optimise expenditure plans, so that there won’t be any wastages and leakages,” he added.
On Dec 20, oil prices tumbled to more than a year’s low with Brent crude falling five per cent to US$54.40 a barrel, while the US benchmark WTI settled at $45.88 a barrel, a 17-month low.
Two days later, oil prices fell to their lowest since the third quarter of 2017, heading for losses of more than 11 per cent in a week, as global oversupply kept buyers away from the market ahead of the festive season and the new year holiday over the next two weeks.
Brent crude fell 53 cents or nearly one per cent to settle at US$53.82 a barrel, after falling during the session to US$52.79 a barrel, the weakest since September 2017.
Sliding oil prices are attributable to recent interest rates hikes by the US Federal Reserve by a quarter of a point, raising concerns on slowing global demand, as economic warning signs sent markets reeling across the globe.
The International Monetary Fund has warned that the storm clouds of the next global financial crisis are gathering despite the world financial system being unprepared for another downturn.
The falling trend of oil prices is clearly a downside for Malaysia, as they are for much of the region.
As a net oil exporter, falling oil prices mean that the US dollar volume of exports will be reduced in line with the expectation of a weaker global economy, as well as export orders in a number of countries.
Finance Minister Lim Guan Eng said the government would only recalibrate the 2019 Budget if the average crude oil price dipped below US$ 50 per barrel. The Finance Ministry had prepared next year’s budget based on crude oil prices of US$70 per barrel.
A protracted trade war will be negative for global growth and ultimately weigh down demand, but Asia’s unquestionable thirst for oil is real and growing, suggesting the global market will remain stable going into 2019.
In its December meeting, the world’s major oil producers have extended production cuts through to the end of 2018, in a bid to tackle a global glut of crude and keep prices buoyant.
OPEC and its oil allies introduced a fresh round of production cuts at its December meeting of 1.2 million for the first six months of 2019.
The oil cartel and other major producers, including Russia, agreed that the curbs which started in January and had lifted a barrel of Brent crude from US$40 to US$50 last year to more than US$60 now, will continue for a further nine months.