Oil prices have already hit four-month highs, forcing a range of analysts to overhaul their expectations for this year.
“The latest Brent rally has brought prices to our peak forecast of $67.5/bbl, three months early,” Goldman Sachs wrote in a note. The investment bank said that “resilient demand growth” and supply outages could push prices up to $70 per barrel in the near future. It’s a perfect storm: “supply loses are exceeding our expectations, demand growth is beating low consensus expectations with technicals supportive and net long positioning still depressed,” the bank said.
The outages in Venezuela could swamp the rebound in supply from Libya, Goldman noted. But the real surprise has been demand. At the end of 2018 and the start of this year, oil prices hit a bottom and concerns about global economic stability dominated the narrative. But, for now at least, demand has been solid. In January, demand grew by 1.55 million barrels per day (mb/d) year-on-year. “Gasoline in particular is surprising to the upside, helped by low prices, confirming our view that the weakness in cracks at the turn of the year was supply driven,” Goldman noted. “This comforts us in our above consensus 1.45 mb/d [year-on-year] demand growth forecast.”
Demand in China is growing at a stronger rate than expected, while other emerging markets are set to shake off a rough 2018 that saw a strong dollar, rising interest rates and high oil prices.
Meanwhile, other analysts are also similarly bullish. “As risky assets focused on macro concerns, oil markets have largely overlooked supply-side tightness in 1Q19 that has helped global oil markets to rebalance since the end of 2018,” JPMorgan Chase said in a report. “With a potential for a US-China trade talk resolution emerging, oil prices should finally break out of the narrow trading range and should be supported in the very near-term due to policy-driven supply-side tightness.” Related: LNG Sector Dangerously Dependent On Chinese Demand
A supply deficit could become rather significant, the bank said, with total oil products demand growth at 1.03 mb/d against supply growth of only 0.3mbd. The second quarter is particularly tight. “As OPEC+ cuts begin to bite and non-OPEC supply tightens in 1H19, due to Canadian curtailments, a temporary US production growth slowdown, and maintenance in some of the key global oil fields (Kashagan particularly), we expect 2Q19 to have a theoretical tightness of over 1.2mbd in global balances.” A supply deficit of 1.2 mb/d is rather notable given the roughly 1.5 mb/d surplus in the fourth quarter of last year, the bank said.
Both Goldman Sachs and JPMorgan see the supply deficit fading in the second half of the year unless OPEC+ continues to over-comply with the production cuts. U.S. shale could rebound from the current lull, while the fate of OPEC+ compliance is up in the air. “Hence, we think OPEC+ cuts will need to be extended not just to the end of 2019 but also into 2020 if they want to avoid another oil price crash,” JPMorgan wrote. Related: Pakistan Aims To Become A Natural Gas Hotspot
Of course, there is no shortage of uncertainty to these – or any other – price scenarios. In particular, the Trump administration will have a lot of influence over what unfolds this year in the oil market. Trump has helped exacerbate the crisis in Venezuela, where the output declines had somewhat stabilized late last year. Venezuela’s production fell by 142,000 bpd in February, while the losses this month have the potential to be even worse.
The U.S. is also weighing the expiration of sanctions waivers on Iran, and the tight oil market could force Trump to extend some of them. The Department of Energy could also release oil from the strategic petroleum reserve, while the U.S. Congress is working on NOPEC legislation, which could threaten OPEC coordination. Moreover, it is unclear how OPEC+ might respond to any of those actions. For instance, Saudi Arabia could ramp up supply to crash prices in response to NOPEC being signed into law. Or, they could continue to over-comply with production cuts after making the mistake of abandoning them too early last year. The permutations are endless, so take each price forecast with a grain of salt.
By Nick Cunningham of Oilprice.com
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Moreover, OPEC+ cuts and a strict adherence by OPEC members to the cuts and also Saudi Arabia’s steep cutting of its production and exports will most probably re-balance the global oil market by the end of the second quarter. If this didn’t happen by then, there is the possibility that the cuts could be extended until the end of the year or until the global oil market has become irrevocably balanced.
One bearish element, however, is still at play, namely the failure of US sanctions so far to cost Iran’s oil exports the loss of even a single barrel of oil. That is why the Trump administration has no alternative but to renew the sanction waivers it issued last year to the eight biggest buyers of Iranian crude when they expire in May or issue new ones for no other reason than to use them as a fig leaf to mask the fact that US sanctions are doomed to fail and that the zero exports option is a bridge too far.
The countries which account for 95% of Iranian oil exports, namely, China (35%), India (33%), the EU (20%) and Turkey (7%) not only have upped their purchases but will continue to purchase Iranian crude with or without waivers. Japan and South Korea accounting for the remaining 5% are still buying Iranian crude albeit with sanction waivers. Moreover, the renewal of the sanction waivers will happen irrespective of the level of oil prices then or a total collapse of Venezuelan oil production.
The reason that oil prices have barely budged when sanctions were imposed on Venezuela is due to the fact that Venezuela’s oil production has already been declining for more than two years due to the economic collapse and years of mismanagement and underinvestment in the oil industry.
US sanctions have only knocked off 500,000 barrels of oil a day (b/d) which Venezuela used to export to the US but these exports have been redirected to India, Turkey and the EU so there is no loss of supply in the market.
An outage in Libya hardly registers on the global oil market radar as the global oil market has already factored in such an outage since 2011.
Moreover, threatening OPEC with the NOPEC legislation would lead to more tightening of the global oil market and steep rising oil prices. This is so because OPEC has enough firepower to retaliate against the US and inflict damage on the US economy where it hurts most, namely high oil prices and a switch from the petrodollar to the petro-yuan thus the undermining the core of the US financial system. Therefore, the threat to sue OPEC or its members is a lot of hot air.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London