The oil market could swing into a surplus in early 2019 as spare capacity is deployed, Goldman Sachs said in a note to clients cited by Reuters. The investment bank’s warning might not have an immediate effect on prices as traders are at the moment too preoccupied with the worry that OPEC’s spare capacity is at a historic low, but once it sinks in, prices could reverse their climb.
“While upside price risks will prevail for now, fundamental data outside of Iran has not turned bullish in our view,” the investment bank’s analysts said in the note. “We expect fundamentals to gradually become binding by early 2019 as new spare capacity comes online.”
Goldman’s analysts said production in Libya and Nigeria was higher than expected, by 300,000 bpd, and coupled with Saudi Arabia’s production ramp-up and the political stabilization of Iraq, which improved prospects for higher output from Kurdistan, it could provide a supply buffer for the final quarter of the year, essentially reducing the supply worry stemming from the upcoming Iran sanctions.
The bank still expects 1.5 million bpd loss in Iranian supply, although others put the loss higher, at 2 million bpd, and others are skeptical about the sanctions cutting Iranian supply by even 1 million bpd, but until the shipping data for November starts flowing, it’s anyone’s guess. In fact, even then it would be guesswork as Iranian tankers are already switching off their tracking devices as they head out from the export terminals.
Goldman Sachs—which has been bullish on oil for most of this year— said in mid-July that it continues to expect that Brent Crude prices could retest the $80 a barrel threshold this year, but probably only late in 2018, not this summer, as uncertainties mount over the timing and magnitude of global supply disruptions. The bank turned out right and before it expected it as the oil market slipped into excessive emotionality, as Russia’s Alexander Novak put it this week.
By Irina Slav for Oilprice.com
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Really? Why is that? What has changed? Lots of speculations about the contribution of Iran, but even without that contribution oil prices continued to rise - the real reason for today's price has little to do with Iran, and much more to do with the fundamentals. The US shale oil producers have ground to a halt and it is not gonna change fast. They ground to a halt close to the mark of of 11 mbd, much lower than the initial forecasts predicted too.
The world continues to increase its appetite for oil.
The major traditional companies lost years of time in terms of investment, and it's not very clear how in a matter of one year in 2019 the oil market is gonna wave a magic wand and catch on what is a major long-term under-investment in the oil sector.
Spare capacities don’t grow on trees. They need time and lasting high oil prices to develop. That begs the question as where would additions to global spare capacity come from.
Libya and Nigeria can’t add to global spare capacity as their production is erratic: one day up and the next down. Venezuela’s production is in decline while OPEC’s current spare capacity could at best be estimated at 1.5 million barrels a day (mbd).
Moreover, OPEC and particularly Saudi Arabia and Russia are unable to raise their production significantly beyond the 650,000 barrels a day (b/d) which Saudi Arabia and Russia combined have already added two months ago.
So other than OPEC’s small spare capacity which is currently being deployed, there is no chance for adding to global spare capacity in the next three years let alone the first quarter of 2019. As a result, the current robust market fundamentals will continue to push oil prices upward to $85-$90 a barrel this year possibly even hitting $100 next year.
As for US sanctions against Iran’s oil exports, they are doomed to fail miserably and Iran will not lose a single barrel from its oil exports.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London