Wood Mackenzie predicts the possible risks and uncertainties for 2019 focusing on oil demand, tight oil upside, and Iran’s export volumes as well as IMO’s 2020 sulphur cap regulations.
Namely, Simon Flowers, Chairman and Chief Analyst in Woodmac, noted that Brent over U.S.$80 a barrel always seemed too good to last, defying the fundamentals. Woodmac expects Brent to average US$66/bbl in 2019.
According to Simon Flowers, the following could threaten Woodmac’s base case in 2019.
- The economic slowdown and oil demand: Woodmac expects 1.1 million b/d in 2019, yet the trend is at risk. The China-US trade conflict and political tensions are affecting negatively the global economy. A decrease in the global economy would affect oil demand growth by 0.8 million b/d in 2020 compared with Woodmac’s base case. A severe recession could wipe out oil demand growth altogether by 2020.
- The tight oil upside: Tight oil volumes rose by 1.5 million b/d, delivering 0.5 million b/d more by the end of 2018 in comparison to what it was expected, mostly from the Permian. Operators completed more wells and were able to get the oil to market despite pipeline constraints. Woodmac expects 1.1 million b/d of growth in 2019 combined with possible risk.
- OPEC and Iran: Iran’s exports decreased from 2.8 million b/d in April to 1.1 million b/d by the end of 2018 as buyers withdrew to comply with US sanctions imposed in November. Exports could increase by 0.3 million b/d under the terms of the 120-day waivers granted to China, India, Italy, Greece, Japan, South Korea, Taiwan and Turkey. Renewal may force OPEC to cut production again for H2 2019 during its June meeting. The possibility of no renewal takes more Iranian crude off the market, opening the door for OPEC to lift its self-imposed production constraints.
- The compounding effect of underspend: A return to organic growth must come at some stage to deliver the new volumes to meet a looming supply gap beyond the mid-2020s. Full-cycle exploration returns, back in double digits, are attractive again. Given lead times from discovery to production, the industry may come to rue its present lack of investment in exploration.
- Downstream and the IMO: The entire refining value chain needs to be updated in the next 12 months for the 2020 regulation on marine fuels. Sulphur content must be decrease from 3.5% to 0.5%. This is a big deal for refiners, affecting 3.5 million b/d of HSFO volumes. It will impact crude prices, differentials, product prices and refining margins.
