Market Watch

Looking forward, oil demand for the Middle East region in 2H19 is anticipated to improve over 1H19 levels, driven by improvements in Saudi Arabian oil demand data in July and August. Moreover, in 2020, assumptions are focused on healthier demand for transportation and industrial fuels, compared with 2019, according to OPEC Monthly Oil Market Report-October 2019

WORLD OIL SUPPLY

The non-OPEC oil supply growth forecast for 2019 was revised down by 0.16 mb/d from the previous assessment to a level of 1.82 mb/d. This is due to downward revisions mainly in the US, as well as in Norway and the UK, which outpaced upward revisions in Kazakhstan and China, among others. US oil supply growth has now been revised down to 1.67 mb/d y-o-y. The non-OPEC oil supply growth forecast for 2020 was revised down by 0.05 mb/d from last month’s assessment to 2.20 mb/d y-o-y due to downward revisions to Kazakhstan and Russia, which outpaced upward revisions, mainly to China.

The 2020 non-OPEC supply forecast remains subject to many uncertainties including oil price levels, capital spending, infrastructure constraints, as well as drilling and completion activities, particularly in the US. OPEC NGLs were revised down by 0.02 mb/d and are now expected to grow by 0.05 mb/d to average 4.81 mb/d in 2019, while growth will slow to 0.03 mb/d in 2020, reaching 4.84 mb/d. In September, OPEC crude oil production decreased by 1,318 tb/d to average 28.49 mb/d, according to secondary sources.

CRUDE OIL PRICE MOVEMENTS

The OPEC Reference Basket (ORB) rose $2.74, or 4.6%, month-on-month (m-o-m) in September to settle at $62.36/b, supported by concerns about supply disruptions and geopolitical risks. In September, ICE Brent averaged $2.79, or 4.7%, m-o-m higher at $62.29/b, while NYMEX WTI rose m-o-m by $2.12, or 3.9%, to average $56.97/b. Year-to-date (y-t-d), ICE Brent was $7.98, or 11.0%, y-o-y lower at $64.75/b, while NYMEX WTI declined by $9.69, or 14.5%, y-o-y to $57.10/b. Brent and Dubai crude oil forward price structures were in steep backwardation in September, while the WTI backwardation curve flattened slightly in the front end. Hedge funds and other money managers turned slightly positive on the outlook for crude oil prices compared to a month earlier.

WORLD ECONOMY

The global economic growth forecast remains at 3.0% for 2019. All regions remain unchanged in terms of growth estimates for the year, with the exception of Russia, which was revised down by 0.1 pp to 1.0%, following low 1H19 growth. For 2020, the global GDP forecast was revised down to 3.0% from 3.1%. Among other issues, it seems increasingly likely that the slowing growth momentum in the US will carry over into 2020, while ongoing uncertainties surrounding the EU, including Brexit, will remain. Moreover, rising US tariffs on EU imports and ongoing US-China trade issues are dampening growth momentum. US growth was revised down by 0.1 pp to 1.8% for 2020, while Euro-zone growth remains at 1.1% and Japan at 0.3%. China’s and India’s growth forecast for next year is also unchanged at 5.9%, and 6.7%, respectively. Similarly, Brazil’s 2020 growth forecast remains unchanged at 1.4%, while Russia remains at 1.2%.

WORLD OIL DEMAND

In 2019, world oil demand growth was revised down marginally by 0.04 mb/d to 0.98 mb/d, reflecting the latest available data in OECD Americas and Asia Pacific which necessitated the downward adjustment. In 2020, world oil demand is forecast to grow by 1.08 mb/d, in line with last month’s projections. OECD countries are anticipated to add 0.07 mb/d to global oil requirements in 2020, while non-OECD countries are projected to be the largest contributor to world oil demand growth by adding an estimated 1.01 mb/d, both unchanged from the last month’s projections. As a result, total world oil demand is anticipated to average 99.8 mb/d in 2019 and 100.88 mb/d in 2020.

THE OIL FUTURES MARKET

Crude oil futures prices recovered in September following a large disruption in two key oil facilities in Saudi Arabia which caused a temporary outage of about 5.7 mb/d of the country’s oil production. ICE Brent prices jumped by $8.8, or about 15% in one session on 16 September as traders tried to assess the

impact of the disruption on the global oil supply and balance, amid risks of heightening tension in the Middle East.

Nonetheless, concerns about a slowdown in the global economy – fueled by weak macroeconomic data and an ongoing trade dispute between the US and China – dampened the global demand outlook and put, downward pressure on oil prices.

Oil prices rose slightly in the first part of September, underpinned by supportive signals from OPEC+ Ministers during the 24th World Energy Congress and the JMMC in Abu Dhabi, on the need for continued commitment to the Declaration of Cooperation in support of oil market stability on a sustainable basis. Oil prices were also supported by positive economic data from China showing that the services sector expanded in August, and comments by the head of the US Federal Reserve saying that the central bank would act appropriately to support continuing growth in the US economy. An ongoing decline in US crude oil stocks for four consecutive weeks – which fell by about 24 mb – further added support.

During the first week after attacks on oil facilities in Saudi Arabia, oil prices rose significantly, as the market was mainly driven by concerns about a supply shortage and the risk of escalating tensions in the region.

However, oil prices softened in the days following, after Saudi Arabia has successfully restored production to normal levels by the end of September, while all scheduled shipments to customers were fulfilled.

Oil prices declined further in late September on a fading risk premium and a faster-than-expected recovery in Saudi Arabia’s oil production, as well as signs of easing geopolitical tensions in the Middle East, while investors turned their focus to a weakening global economy and wavering oil demand amid the unsolved trade dispute between the US and China.

On a quarterly basis, ICE Brent recorded its biggest decline this year to reach its lowest quarterly average since 4Q17.

In September, ICE Brent was on average $2.79, or 4.7%, m-o-m higher at $62.29/b, while the NYMEX WTI rose m-o-m by $2.12, or 3.9%, to average $56.97/b. Y-t-d, ICE Brent was $7.98, or 11.0%, lower at $64.75/b, while NYMEX WTI declined by $9.69, or 14.5%, to $57.10/b, compared with the same period a year earlier.

DME Oman crude oil futures also increased m-o-m by $2.58 in September, or 4.4%, to settle at $61.86/b. Y-t-d, DME Oman was down by $6.13, or 8.7%, at $64.35/b, compared with the same period a year earlier.

MIDDLE EAST SAUDI ARABIA

For August, the latest monthly data from Saudi Arabia suggests firm growth in total product demand by a solid 0.38 mb/d or 16% y-o-y, the highest monthly y-o-y increase in the past five years and the second consecutive month of increases.

The most notable development was in diesel, as demand flipped into positive territory in June and remained positive over subsequent months. This was supported by a pick-up in construction activity in line with rising cement sales in August for the third straight month and compared with the same month one year earlier, suggesting that diesel consumption is expected to continue growing.

Moreover, oil demand in Saudi Arabia follows certain patterns, normally rising in the summer due to additional air conditioning usage. Demand for residual fuel oil increased by 11% y-o-y in August. It is worth highlighting that demand in Saudi Arabia has been declining y-o-y since 2016 on the

back of programmes geared towards displacing direct crude for burning with natural gas in the power generation sectors in addition to major economic reforms, which include subsidy reductions in household electricity tariffs and transportation fuel retail prices, which adversely affects diesel demand. As a result, total consumption of direct crude for burning shrunk by 25% in 2016, using data from January to August, versus the same period in 2019. The reduction was larger in diesel consumption, as demand for diesel dropped by 29% during the same period of comparison, with consecutive monthly y-o-y declines since April 2016.

Saudi Arabian oil demand is a vital component of Middle East oil demand growth. Receiving further positive data in the months to come will provide strong support to oil demand growth in the region.

IRAQ

In Iraq, oil demand requirements in August decreased for the fifth time in 2019. Total oil demand dropped by more 2% y-o-y with mixed performance among the product mix. While demand for LPG, gasoline and diesel increased, declines in fuel oil, jet/kerosene and naphtha outpaced increasing products. Oil demand decreased by 0.01 mb/d in August and total oil product consumption reached 0.70 mb/d.

Looking forward, oil demand for the Middle East region in 2H19 is anticipated to improve over 1H19 levels, driven by improvements in

Saudi Arabian oil demand data in

July and August. Moreover, in 2020, assumptions are focused on healthier demand for transportation and industrial fuels, compared with 2019. In addition to continued substitution of crude and residual fuel oil for direct burning for electricity generation, emphasis will be placed on the petrochemical industry, additional refining capacities and geopolitical concerns in some countries of the region. For 2019, Middle East oil demand is expected to grow by

0.02 mb/d, while oil demand in 2020 is projected to increase by 0.07 mb/d.