“The recent fall in oil prices is likely to stimulate economic activity and oil demand, particularly in emerging markets.”
Global oil supply is undergoing a structural shift. The US oil industry is growing in importance relative to the OPEC. As a result increased production from non-OPEC producers more than compensated for the output collapse among important OPEC producers such as Iran and Venezuela in 2018.
Slowing global growth, and new US pipelines facilities in H2 2019, as well as the diminished importance of OPEC, have raised concerns around a potential oil glut. At the same time, we believe that financial markets may be overestimating the risks of a global recession. Moreover, lower oil prices – prices were between 14% and 18% lower in January than their 2018 average – are likely to stimulate economic activity and oil demand, particularly in emerging markets. As a result, we expect global oil demand to accelerate slightly to +1.4 million barrels per day (mbd) in 2019 vs +1.3mbd in 2018.
All in all, the global oil supply/demand balance could shift from a current significant surplus to zero at the end of the year if OPEC+ complies with its decision to cut output by 1.2mbd and extends these cuts until the end of the year. In short, OPEC+ discipline will be key for oil prices in 2019.
Key risks in 2019
|OPEC+ extends 1.2mbd output cut beyond summer 2019||OPEC+ production cut agreement unravels|
|Oil prices at current levels spur economic activity and oil demand, particularly in emerging countries||US-China trade negotiations collapse|
|US and China resolve trade dispute, increasing confidence and global economic activity||New US pipelines operational before H2 2019|
|Refining sector falls short of IMO 2020 sulphur regulation requirements||Global economic recession|
|Political turmoil in Iraq and/or Libya limits OPEC output|
|Iran retaliates against US sanctions by disrupting oil shipments in the Strait of Hormuz|
|Source: Pictet WM - AA&MR, 5 February 2019|
Our analysis suggests that we are now close to the long-term fundamental equilibrium price of USD53 for West Texas Intermediate (WTI). However, since our core scenario posits a weaker US dollar in 2019, the equilibrium price is expected to be higher. On a 12-month horizon, the oil price equilibrium is expected to increase to USD60 for WTI and USD70 for Brent if global growth reaches 3.5% and the US dollar weakens by 5%, as expected in our core scenario. But as stated, much depends on OPEC+ compliance with agreed output cuts. If OPEC+ fails to limit production until the end of the year, a gradual convergence towards pre-agreement levels of production will lead to a significant oil supply surplus (+1.4mbd) at end-2019, with significant consequences for prices.
Much like 2018, geopolitical factors are expected to play an important role in the oil market this year. US-China trade negotiations, US sanctions on Iran, OPEC+ decisions, political troubles affecting several important producers (Venezuela, Iraq, Libya, Angola…) will continue to determine oil price dynamics.