Source: S&P Global Platts RADAR, July 18, 2019
Trey Cowan, Senior Analyst, S&P Global Platts
NYMEX WTI Light Sweet Crude Oil Futures are slightly backwardated
over the next three years, indicating the market’s generally bearish
sentiment towards the energy complex. Platts Analytics is currently
taking a contrarian view relative to what the existing the futures curve
Directionally, Platts Analytics anticipates oil prices will
take a turn for the better over the remainder of 2019. Several factors
are tipping the scales towards a more bullish than bearish outlook for oil
prices over the remainder of 2019. A recent webinar for S&P Global Platts
Analytics clients led by Claudio Galimberti and Richard Joswick,
Head of Demand and Refining and Head of Oil Product Pricing
and Trade for S&P Global Platts, respectively, highlighted themes that
could either propel oil prices or push them lower in the months ahead. The
following outline summarizes their views which holistically expect both
domestic and global oil prices to improve beyond existing levels over
the remainder of 2019.
1. Strait of Hormuz – In recent weeks crude prices have surged
after reports of incidents in the Strait of Hormuz including the
June 20th downing of US Navy drone and multiple tanker attacks,
presumably all undertaken by Iranian Revolutionary Guard.
2. Sanctions – Disruptions cause by the sanctions to Iran and
Venezuela are taking some barrels off the market.
3. Saudi Arabian Production – Saudi Arabia has been particularly
respondent to price signals and has adjusted its production accordingly.
Saudi production in 2Q19 was 300,000 barrels per day less than
1Q19 at 9.7 million bpd, according to OPEC Secretariat.
4. OPEC+ Production Cuts Extended – At the beginning of
July OPEC announced that it and participating Non-OPEC members
(primarily Russia) would extend their production cut agreement by another
9 months to the end of March 2020.
5. Tightening Crude Stock Balances – Crude distillation units
(CDUs) or refineries reported record levels of outages during 1H19
relative to prior seasons. Now that these planned and unplanned refinery
outages are past, we should start to see higher runs with both improved
utilizations and margins, which implies a better demand profile for
crude on the near horizon.
6. IMO 2020 – The IMO spec change is expected to pull up global
demand in 2020 due to higher draws on distillates, volumetric gains and
additional fuel oil consumed by the power generation stack due to its
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1. Weakening Demand – EIA recently lowered its global oil
consumption growth projection by -.2 million barrels per day to 1.1 million
barrels per day in 2019. Platt’s Analytics estimate for 2019 global
incremental crude demand is 1.2 million barrels per day. Weather early
in the year was a disruptive factor early in the year for both Europe and
the US impacting demand.
2. Trade Tariffs – The ongoing trade negotiations between the US
and China has created some additional uncertainty that has caused business
planners to take a more cautious wait-and-see approach.
3. Supply Glut of NLGs and Light Tight Oil – The big story behind this
supply glut is the strong uptick in Permian production.
4. Chinese Gasoline Spec Change – automobile purchases have been
weaker of late in China due to Beijing’s decision to alter both
gasoline and diesel specifications.
5. Poor Investing Community Sentiment – Institutional investors
have been trimming their portfolio weights, moving from moderate
energy exposure to underexposure relative to other business sectors.
IMO 2020 is the thumb on scale at the moment that tips things
towards higher crude demand and is also behind Platts Analytics
bullish outlook for some products. Essentially, IMO 2020 calls for the
switch from 3.5% to -.5% Sulphur content in bunker fuel (i.e. from high
Sulphur to low Sulphur fuel oil). It will change drastically the demand
profile even prior to going into effect on January 1, 2020 because ports
and shippers are already preparing for the arrival of this new standard.
Essentially, 3 million barrels per day of high Sulphur fuel oil (HSFO)
demand that was for shipping will disappear once the rule goes into
effect. We anticipate that this no longer needed HSFO will be replaced
with low Sulphur substitutes like Marine Gas Oil and other proven
distillate blends, as shippers will not want to risk damaging their engines
with unproven grades of fuel blends. And we suspect that changes in
prices (due to these changing demand profiles) will incent refiners to adjust
Make no mistake on our simplification of Platts Analytics
observations, this is an extremely convoluted series of adjustments that
is about to happen across the refining complex. And it is our opinion that
these multifaceted gyrations will have an aggregate favorable impact
on light sweet crude demand in the months ahead.
This is article is from S&P Global Platts RADAR, July 17, 2019 issue.
Call 800-371-0083 to request a sample copy.
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