A weekly look at oil markets from the oil expert from SONAR.
The basis for a turn in the oil markets was laid out in two monthly reports released this past week. Both of them are closely watched documents, one of them coming from OPEC and the other released by the International Energy Agency (IEA). What they showed was that cuts in oil production made by OPEC members since their December meeting have been steep and are laying the groundwork for markets to rebalance and possibly go higher.
Neither the IEA nor OPEC projects what OPEC is going to produce. They do project non-OPEC output and that portion of OPEC output that is in natural gas liquids (think propane and butane, among other products). Both agencies subtract those figures from their estimates of worldwide oil demand. In the case of the IEA, what's left behind is known as the "call" on OPEC crude. In the case of the OPEC report, they just call it the "difference."
For many months, the call/difference has been running significantly below actual output. The supply and demand figures are not always expected to be in balance. Historically, there are quarters when inventories are expected to build and periods when they are expected to decline. But with supply exceeding the call/difference for many months, it has been mostly "build," putting downward pressure on prices.
If the IEA and OPEC numbers are correct, that's going to end, especially in the case of the IEA forecasts. The agencies have different projections for demand next year, with OPEC seeing it coming in at an even 100 million barrels per day (b/d) for the year and IEA projecting 100.7 million b/d. (This would be the first time worldwide demand averaged more than 100 million b/d).
As can be seen from the chart, OPEC and the IEA have different views of demand. In particular, in its most recent report the IEA did hold its forecast for growth in 2019 at 1.4 million b/d, the fourth consecutive report it has held to that number. So despite talk about a global slowdown, the IEA isn’t seeing it in its projections for demand growth in 2019.
The agencies’ views of supply without an OPEC component also are different. After subtracting the latter from the former, you end up with the OPEC call/difference. The IEA call for the full year is 31.6 million b/d with quarterly estimates not that much different from that. The OPEC “difference” ranges from about 30.4 million b/d for the first quarter to just under 31 million b/d later in the year, with a full-year average of 30.59 million b/d.
How does that compare with what is going on now? Within the reports laying out those IEA and OPEC projections were also the groups' estimates of what OPEC produced last month. OPEC said it was 30.8 million b/d; the IEA said it was 30.83 million b/d, almost identical. (Other estimates: S&P Global Platts, 30.86 million b/d; Bloomberg, 31.02 million b/d; Reuters, 30.98 million b/d) The IEA and OPEC both reported significant drops in OPEC output in January; OPEC at 797,000 b/d and the IEA at 930,000 b/d, both of them landing at approximately the same spot despite that big difference because they started from different estimates of what December output was.
What that means is that the IEA now sees January OPEC output at less than its "call" – about 600,000 b/d less than the call in the first quarter and almost 1 million b/d less than the rest of the year. The OPEC numbers are a lot more in balance but that’s coming from a place where they were out of balance. Either way, what the groups are calling for is a market that is not going to keep building excessive inventories and where supply is probably going to be less than demand if OPEC holds to these current production levels.
The rapidity and depth of OPEC's cuts have caught most of the market off-guard, and it is resulting in many analysts projecting higher prices over the course of 2019. They aren't looking at a spike but they are seeing support for the benchmark Brent oil as high as $70 per barrel; it is now near $62-$63/barrel. News reports this week said Goldman Sachs, which cut its forecast for oil prices just a few weeks ago, has now reversed course, projecting Brent reaching $67.50 in the second quarter of 2019. "Our constructive outlook for oil prices in 1H19 is predicated on both large supply cuts as well as resilient oil demand growth," the Goldman report said, according to CNBC.
The deep cuts that OPEC has implemented are made necessary by rising output in the non-OPEC world, primarily out of the U.S. In its latest report, the IEA projected that non-OPEC output would rise to an average 2019 output of 62.1 million b/d, up from 60.5 million b/d in 2018. But that’s an average; by the fourth quarter, the output for non-OPEC will be up to 62.8 million b/d, the group said.
Every report that says the implementation of IMO 2020 won't be the disaster for consumers some feared is good news for the trucking and transport sector.
IMO 2020, designed to dramatically lower the sulfur content of marine fuels, is expected to pull additional demand from the same pool of distillates that is used to produce diesel used by trucks. Since predicting an outright price is difficult takes in so many other factors, the focus has been on what existing fuels and new IMO 2020-compliant marine fuels will do relative to each other.
WoodMac, a leading research firm in the energy field, said this week that it had narrowed its estimate of how much a new grade of marine fuel, very low sulfur fuel oil (VLSFO) – which isn't a distillate product – will trade at relative to the existing fuel oil that power ships, high sulfur fuel oil (HSFO).
According to an article published by S&P Global Platts, the current spread between HSFO and the new VLSFO in Rotterdam was about $32/metric tonne (mt). But that's much less than what WoodMac had projected back in September, when it said it the spread next year would be double the $166/mt it averaged in 2017. That would be $332/mt; compare that to the previously mentioned $32.
Alan Gelder, an executive at WoodMac, told Platts: "We are not going to see a doubling, but we believe it will grow, by something like 60 percent, so we've pulled (the estimated 2020 differential) in a bit."
It's just a forecast by one company. But it is one that can give some comfort to the trucking sector worried about what next year will bring. Although it's a comparison between two non-distillates, if VLSFO doesn't soar relative to HSFO, it's a sign that maybe there will be enough of it that the marine sector can limit its demand from the distillate pool.