Oil prices, which spiked following attacks on Saudi oil infrastructure in mid-September, remain in flux beyond 2019, as questions swirl about whether a second quarter dip in demand was transitory or permanent.
Raymond James & Associates Inc. analysts on Monday noted that as 2019 began they had expected the oil price pullback in late 2018 would set the stage for a “healthy” global demand scenario this year.
Volatile oil prices in late 2018 partly led Lower 48 producers and the oilfield services sector to reduce their 2019 activity in oil-heavy unconventional plays.
However, “substantially weaker than expected second quarter global oil demand performance” has led Raymond James to reduce 2019 estimates. The real question is whether 2Q2019 oil demand weakness was a structural change or transitory.
The lion’s share of 2Q2019 demand issues likely resulted from a confluence of unusual events that reduced oil demand, said the Raymond James team led by J. Marshall Adkins.The events included flooding in the U.S. Midwest, impacts from the U.S./China trade war, UK’s preparation to leave the European Union (EU), aka Brexit, as well as destocking in petrochemical and other oil feedstocks.
The ongoing trade war and Brexit are driving “much more uncertainty” than the transitory Midwest flooding, analysts said.
“Given evidence suggesting Chinese chemical/industrial destocking during the quarter, we are tempted to believe that the second quarter demand was an anomaly rather than the first sign of ongoing global oil demand deterioration. More importantly, recent global oil inventory trends support a stout resumption of year/year global oil demand growth this quarter.”
Raymond James plans to formally issue an updated oil supply/demand model in the coming weeks, but it trimmed its 2019 demand outlook to a 650,000 b/d growth rate year/year, which is about half the 1.4 million b/d rate anticipated as the year began.
“Our 2020 demand growth remains at 1 million b/d but the flow-through from the lower 2019 numbers takes our absolute demand numbers lower,” analysts noted.
Raymond James’ demand estimates are sharply below the International Energy Agency’s current forecast, which is calling for oil demand this year to grow by 1.1 million b/d and in 2020 by 1.3 million b/d.
Fitch Ratings credit analysts weighed in separately on the impact of the Saudi attacks and the supply/demand balance.
“We believe that disruptions ultimately will have a limited impact on the supply-demand balance this year, especially as the market remains otherwise well supplied,” Fitch analysts said. “We have kept our price deck assumption for Brent at $65/bbl for 2019, though we expect volatility to remain significant in 4Q2019.”
Fitch still assumes average Brent prices to be marginally lower in 2020 from 2019 at around $62.50/bbl because of “waning demand and increased supply from continued U.S. shale growth and recovered production in Saudi Arabia.”
However, the Organization of the Petroleum Exporting Countries and its allies, including Russia, are expected to manage supply to avoid large surpluses or deficits.
“In 2020, the coming into force of International Maritime Organization Sulphur 2020 regulation could support demand for Brent and West Texas Intermediate, which are low-sulphur oil grades,” Fitch noted. “The long-term price of $57.5/bbl for Brent takes into account our view on the marginal costs of oil production.”
NBP Assumptions Lower
Meanwhile, Fitch has revised lower natural gas price assumptions for 2019-2021 for the National Balancing Point (NBP) because of a liquefied natural gas (LNG) supply glut in Europe and slower global economic growth. The NBP is a virtual trading location to sell and purchase UK natural gas and is considered the most liquid gas trading point in Europe.
“European spot natural gas prices collapsed in 1Q2019,” and increased supply from the Lower 48 plays and elsewhere “was not matched by sufficient demand growth,” the firm noted.
In September, the NBP price averaged $4.70/Mcf, compared with $8.10/Mcf in September 2018, Fitch noted. “Furthermore, the daily closing price has fluctuated between $2.40 and $3.90/Mcf since the beginning of August. Prices are likely to rise in 4Q2019 when the heating season starts. However, we expect the recovery to be slow given unusually high volumes of gas accumulated in European underground storage facilities and slowing demand.”
Rebalancing the gas market may take longer than Fitch analysts had anticipated primarily because of lower Chinese growth.
“China was the major driver for LNG demand and accounted for 48% of global demand growth over the past five years (2014-2018), followed by Europe (19%) and India (12%), according to BP plc,” Fitch noted. “However, Chinese LNG demand may wane because of slowing economic growth amid the U.S.-China trade war. China's authorities expect its annual gas consumption growth to decelerate to 10% year/year in 2019 from 17.5% in 2018.”
Fitch’s long-term view on NBP is unchanged, however. “While more active LNG trade is likely to result in narrower differentials between various hubs, we believe the $3.75/Mcf spread between Henry Hub and NBP we currently assume in the long-term assumptions is reasonable and accounts for full-cycle costs of delivering natural gas from the U.S. to Europe.”
Analysts with BofA Merrill Lynch Global Research last week said global natural gas prices had fallen enough to absorb the current glut and allow the EU power sector to switch from coal. However, the BofA team said mild winter or worsening macro could lead to severe price issues across the board. As global gas is “more connected than ever,” the weather could play a big role.