In this Report, we publish our first outlook for 2020. As we do so, volatility has returned to oil markets with a dramatic sell-off in late May seeing Brent prices fall from $70/bbl to $60/bbl.
Until recently, the focus has been on the supply side with the
familiar list of uncertainties – Iran, Venezuela, Libya, and the Vienna
Agreement – lifting Brent prices above $70/bbl in early April and keeping them
there until late May. Not that supply concerns have gone away: yesterday oil
prices initially increased by 4% on news of the attacks on two tankers in the
Gulf of Oman, before easing back slightly.
Now, the main focus is on oil demand as economic sentiment
weakens. In May, the OECD published an outlook for global GDP growth for 2019
of 3.2%, lower than our previous assumption. World trade growth has fallen back
to its slowest pace since the financial crisis ten years ago, according to data
from the Netherlands Bureau of Economic Policy Analysis and various purchasing
managers’ indices.
The consequences for oil demand are becoming apparent. In 1Q19,
growth was only 0.3 mb/d versus a very strong 1Q18, the lowest for any quarter
since 4Q11. The main weakness was in OECD countries where demand fell by a
significant 0.6 mb/d, spread across all regions. There were various factors: a
warm winter in Japan, a slowdown in the petrochemicals industry in Europe, and
tepid gasoline and diesel demand in the United States, with the worsening trade
outlook a common theme across all regions. In contrast, the non-OECD world saw
demand rise by 0.9 mb/d, although recent data for China suggest that growth in
April was a lacklustre 0.2 mb/d. In 2Q19, we see global demand growth 0.1 mb/d
lower than in last month’s Report. For now though, there is optimism that
the latter part of this year and next year will see an improved economic
picture. The OECD sees global GDP growth rebounding to 3.4% in 2020, assuming
that trade disputes are resolved and confidence rebuilds. This suggests that
global oil demand growth will have scope to recover from 1.2 mb/d in 2019 to
1.4 mb/d in 2020.
Meeting the expected demand growth is unlikely to be a problem.
Plentiful supply will be available from non-OPEC countries. The US will
contribute 90% of this year’s 1.9 mb/d increase in supply and in 2020 non-OPEC
growth will be significantly higher at 2.3 mb/d with US gains supported by
important contributions from Brazil, Canada, and Norway. Later this month,
Vienna Agreement oil ministers, faced with short-term uncertainty over the
strength of demand and relentless supply growth from their competitors, are due
to discuss the fate of their output deal.
Ministers will note that OECD oil stocks remain at comfortable
levels 16 mb above the five-year average. However, they will also note that
although in 1Q19 weak demand helped create a surplus of 1.1 mb/d, in 2Q19 the
market is in deficit by an estimated 0.4 mb/d, with the backwardated price
structure reflecting tighter markets. This deficit is partly due to the fact
that in May the Vienna Agreement countries cut output by 0.5 mb/d in excess of
their committed 1.2 mb/d. In 3Q19, the market could receive further support
from an expected pick-up in refining activity.
Recently, high levels of maintenance in the US and Europe, low
runs in Japan and Korea, and fallout from the Druzhba pipeline contamination
contributed to weak growth in global refining throughput. This could be about
to change: according to our estimates, crude runs in August could be about 4
mb/d higher than in May. This might cause greater tightness in crude markets,
particularly for sour barrels if the Vienna Agreement is extended and there is
no change in the situations in Iran and Venezuela. Of course, much depends on
the strength of oil demand later in the year.
A clear message from our first look at 2020 is that there is
plenty of non-OPEC supply growth available to meet any likely level of demand,
assuming no major geopolitical shock, and the OPEC countries are sitting on 3.2
mb/d of spare capacity. This is welcome news for consumers and the wider health
of the currently vulnerable global economy, as it will limit significant upward
pressure on oil prices. However, this must be viewed against the needs of
producers particularly with regard to investment in the new capacity that will
be needed in the medium term.