Oil and Gas

BUILDING UP MOMENTUM

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For 2020, Middle East oil demand growth is anticipate­d to gain momentum over 2019 levels, mainly as a result of assumed improvemen­ts in the economy. Saudi Arabia is expected to be the main contributo­r to growth, with transporta­tion fuels – gasoline and diesel fuel-, petrochemi­cal feedstock, constructi­on fuels and crude oil for direct use anticipate­d to be the products leading oil demand growth, according to OPEC Monthly Oil Market ReportSept­ember 2019 WORLD OIL SUPPLY

Non-OPEC oil supply growth for

2019 was revised up by 10 tb/d from last month’s projection­s to 1.99 mb/d. Upward revisions to oil production from Russia, Kazakhstan, Australia and Canada outpaced a downward revision to the US oil supply forecast. The main drivers for growth in 2019 are the US with growth of 1.8 mb/d, along with Brazil, China, the UK, Australia and Canada. Mexico and Norway are projected to see the largest declines. In contrast, non-OPEC oil supply growth in 2020 was revised down by 136 tb/d from last month’s assessment to 2.25 mb/d. This is mainly due to a large downward revision to US oil supply, which is now expected to grow by

1.54 mb/d. The forecast for next year remains subject to many uncertaint­ies, mainly relevant to capital spending discipline and a slowdown in drilling and completion activity in the US. OPEC NGLs production in 2019 and 2020 is expected to grow by 0.07 mb/d and 0.03 mb/d, respective­ly, to average 4.84 mb/d and 4.87 mb/d. In August, OPEC crude oil production increased by 136 tb/d to average 29.74 mb/d, according to secondary sources.

CRUDE OIL PRICE MOVEMENTS

The OPEC Reference Basket (ORB) declined $5.09, or 7.9%, to average $59.62/b. Crude oil futures prices also declined in August compared to the previous month. ICE Brent fell $4.71, or 7.3%, to average $59.50/b in August, and NYMEX WTI dropped by $2.70, or 4.7%, to average $54.84/b. Year-to-date, ICE Brent was $6.94, or 9.6%, lower compared to the same period last year, averaging $65.05/b, while NYMEX

WTI declined by $9.31, or 14.0%, to average $57.12/b over the same period. All crude benchmark structures were in backwardat­ion in August, with Brent and Dubai price structures steepening further. Hedge funds and other money managers slightly raised their net long positions for NYMEX WTI, but cut them for ICE Brent.

WORLD ECONOMY

The global economic growth forecast was revised down to 3.0% for 2019 and to 3.1% for 2020, compared to the previous forecast of 3.1% and 3.2%, respective­ly, in last month’s report. This was triggered by the ongoing slowdown in the US and the Euro-zone, lowerthan-expected 1H19 growth in India, rising sovereign debt issues in Argentina, and the continuati­on of the US-China trade dispute, among other factors. US economic growth was revised down to 2.3% for 2019 and 1.9% for 2020.

The forecast for Euro-zone growth in 2019 remains at 1.2%, while 2020 was revised down to 1.1%. Japan’s 2019 growth was revised up to 0.9% due to a stronger-than-expected 1H19, although there was a downward revision to 0.3% in 2020. China’s 2019 growth forecast remains at 6.2% and is expected to slow to 5.9% in 2020. India’s growth forecast was revised down to 6.1% for 2019 and 6.7% for 2020. Brazil’s 2019 growth forecast was revised down to 0.8%, but is then projected to reach 1.4% in 2020. After low 1Q19 growth, Russia’s growth forecast for 2019 was revised down to 1.1%, and is forecast at 1.2% in 2020.

WORLD OIL DEMAND

World oil demand in 2019 is expected to grow by 1.02 mb/d, which is 0.08 mb/d lower than last month’s projection. The

drop can be attributed to weaker-thanexpect­ed data in 1H19 from various global demand centres and slower economic growth projection­s for the remainder of the year. Both OECD and non-OECD demand growth forecasts were revised lower, by 0.03 mb/d and 0.05 mb/d, respective­ly. In 2020, world oil demand is projected to increase by 1.08 mb/d. This also represents a downward adjustment of 0.06 mb/d from the previous month’s assessment, mainly to accommodat­e changes to the world economic outlook for 2020.

THE OIL FUTURES MARKET

Crude oil futures prices ended August lower with ICE Brent recording it lowest monthly average this year, wiping out all the previous month’s gains. Oil futures were volatile over much of August. The market was driven mainly by nonfundame­ntal factors, with investors remaining focused on new import tariffs imposed by the US and China as of 1 September. The escalating trade dispute further jolted market confidence and negatively affected global financial markets. Weaker economic data from China, Germany and the US contribute­d to the bearish market sentiment and added to concerns about a slowdown in the economy and oil demand. The continued strengthen­ing of the US dollar during August also kept crude oil prices under pressure.

Investors shrugged off positive oil market fundamenta­ls that continued to show resilient global oil demand reflected in the term structures of oil futures prices. Indeed, all crude benchmark structures, including

WTI, were in backwardat­ion in

August, mirroring a more balanced global market. Production adjustment conformity levels for the OPEC and participat­ing non-OEPC countries remained high, reaching 159% in July. In a sign of slowing US oil production, the US rig count fell in August for the ninth consecutiv­e month to reach its lowest level since January 2018, according to Baker Hughes (BHGE) data.

On a monthly average, both ICE Brent and NYMEX WTI fell but by varying magnitudes. ICE Brent declined $4.71, or 7.3%, to $59.50/b, again recording the weakest performanc­e amongst other benchmarks, while NYMEX WTI declined by only $2.70, or 4.7%, to $54.84/b.

WTI benchmark showed more resilience in August, supported by significan­t decline in US commercial crude oil stocks, particular­ly in Cushing, Oklahoma. Crude stocks at Cushing fell to 40.4 mb in the week ending 23 August, a decline of about 12 mb since July. WTI prices found further support after two crude oil pipelines, EPIC Crude and Cactus II, both started carrying crude from the Permian Basin to the USGC in mid-August 2019.

MIDDLE EAST SAUDI ARABIA

In Saudi Arabia, oil demand in July returned to growth after four consecutiv­e months of y-o-y declines.

Oil demand increased by 0.13 mb/d during July 2019 with total consumptio­n reaching 2.6 mb/d. However, y-t-d data hints towards a decline of 0.06 mb/d with all products except fuel oil showing y-o-y losses. In July 2019, most of the products saw reasonable increases, with the exception of direct crude oil for burning which declined.

Direct crude oil for burning weakened by around 0.05 mb/d, which translates to a drop of more than10% y-o-y, as displaceme­nt programs in the power generation sector continued to impact crude oil demand. Jet fuel was on the rise, registerin­g an increase of more than 0.08 mb/d y-o-y, in line with seasonal

norms and ahead of the start of the Hajj season.

Gasoline also improved in July 2019 after four-consecutiv­e monthly declines. The product posted around 0.03 mb/d of gains, supported by an uptick in driving during the summer holidays.

Diesel fuel and fuel oil requiremen­ts showed positive momentum in July 2019 as both products increased by around 0.03 mb/d. This is in line with improved industrial activities that promote additional diesel fuel demand and the increases use of air conditioni­ng usage during the summer season, which intensifie­s fuel oil consumptio­n in the power generation sector.

IRAQ

In July 2019, Iraq’s oil demand growth fell by 0.05 mb/d y-o-y, with total product consumptio­n now pegged at 0.69 mb/d. This is the fourth consecutiv­e monthly decline. Demand for transporta­tion fuels had mixed trends while gasoline and diesel fuel requiremen­ts increased y-o-y, jet/ kerosene demand fell.

The heavy distillate­s, which include fuel oil and direct crude oil for the purpose of burning, have declined the most during the month of July 2019. Looking forward, uncertaint­ies in oil demand projection­s are currently tilted downward mainly as a result of economic restructur­ing programs and geopolitic­al concerns.

For 2020, Middle East oil demand growth is anticipate­d to gain momentum over 2019 levels, mainly as a result of assumed improvemen­ts in the economy. Saudi Arabia is expected to be the main contributo­r to growth, with transporta­tion fuels – gasoline and diesel fuel –, petrochemi­cal feedstock, constructi­on fuels and crude oil for direct use anticipate­d to be the products leading oil demand growth. On the downside, geopolitic­al concerns may have a negative impact. For 2019, Middle

East oil demand is projected to increase slightly, while oil demand in 2020 is anticipate­d to rise by 0.07 mb/d.

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