February 2018
Oil Price Paths in 2018:
play bertween OPEC, US Shale An Overview of the Crude Oil
TheMarket
Interplay bertween OPEC, US Shale
and Supply Interruptions
Bassam Fattouh and Andreas Economou
ets with Brent prices breaking through $70 a barrel for a
oil benchmarks flipping into backwardation. Yet, there is
Oxford Institute for Energy Studies
rket, with very divergent views among market observers
in 2018, with some revising upwards their forecasts to
onvinced that the market fundamentals can sustainably
wer path in the mid $60/b. The key uncertainties behind
ent views about:
e output cut agreement reached in November 2016;
oil price rise;
on global oil demand;
ragile geopolitical environment.
e oil price path could evolve in 2018 by evaluating the
oil market using a structural model of the oil market and
Oxford Institute for Energy Studies, Oxford UK, 2 April 2019
ecast scenarios are not predictions of what will happen,
l price risks conditional on certain events that are known
othetical events. Our reference forecast scenario projects
Oil Price Paths in 2018:
in 2019
and Supply Interruptions
Abstract
2018 started on a positive note for oil markets with Brent prices breaking through $70 a barrel for a
few days and all the key international crude oil benchmarks flipping into backwardation. Yet, there is
still a wide uncertainty engulfing the oil market, with very divergent views among market observers
about how the oil price path could evolve in 2018, with some revising upwards their forecasts to
higher than $80/b while others are less convinced that the market fundamentals can sustainably
support a price above $70/b, expecting a lower path in the mid $60/b. The key uncertainties behind
these divergent views mainly pertain to different views about:
The OPEC/NOPEC exit strategy from the output cut agreement reached in November 2016;
US shale supply response to the recent oil price rise;
The potential impact of higher oil prices on global oil demand;
The extent of supply disruptions amid a fragile geopolitical environment.
In this Energy Insight, we analyse how the oil price path could evolve in 2018 by evaluating the
aforementioned risks underlying the world oil market using a structural model of the oil market and
considering various forecast scenarios. Forecast scenarios are not predictions of what will happen,
but rather modelled projections of various oil price risks conditional on certain events that are known
at the time of the forecast or some other hypothetical events. Our reference forecast scenario projects
 Volatile price path and time spreads
Daily Brent and WTI price, Jan 18 – Mar 19 Brent time spreads (M1-M2), Jan 18 – Mar 19

After a steady recovery in 1H18, oil prices exhibited high Time spreads switched from backwardation to contango in
volatility in 2H18 and after falling sharply in December, mid-2018 as inventories rose and the prospects for global
prices started recovering in early 2019 with Brent demand worsened, although they have recently returned to
surpassing $67/b in March. backwardation.

Source: EIA, Argus, OIES

 Back end of the forward curve sticky
Brent-Dubai and WTI-Dubai spreads, Jan 18 – Mar 19 ICE Brent forward curve, as of 25 Mar 19

The spreads between light sweet – medium sour are also While the price in the front end of the curve has increased
exhibiting wide volatility, reflecting the volatility in OPEC sharply in 1Q19, the back end of the forward curve
output and the geopolitical outages. remains stuck at around $60/b.

Source: Argus, ICE, OIES

What caused the oil market imbalance?
Have these factors faded?
 Back to square one
Supply/Demand balance, 1Q15 – 2Q19 OECD oil liquids stocks, Jan 15 – Jan 19

Sharp increases in OPEC and non-OPEC production along OECD inventories declined below their 5-year average in
with weaker-than-expected demand conditions in 4Q18 led 1H18 but started building again in 2H18, prompting OPEC
to a large build up in stocks and drove the market out of and its allies to reach another agreement in December 2018
balance. to bring the market into balance.

Source: IEA, OIES

 Two key factors that drove the market out of balance
GCC core and Russian production, Jan 18 – Feb 19 US crude production, Jan 17 – Dec 19E

Overall the increase in the GCC(3) plus Russian output between US shale surprised on the upside. Relative to the start of
May and November 2018 reached 1.91 mb/d, which exceeded, 2018 the EIA underestimated US oil production by a
by 160,000 b/d, the entire OPEC+ cut target. remarkable 0.6 mb/d in 2018.

Source: IEA, EIA , OIES

 Shift 1.0 in Saudi Arabia output policy
The dynamics of Saudi oil output policy in 2018 Saudi oil output and exports, Jan 17 – Jan 19

Until February 2018 the message from Saudi Arabia was: “while
crude stocks have fallen, it is premature to exit from the production deal
and if producers ‘err on the side of overbalancing, then so be it”.

The key question at the time was whether the 5-year average of OECD
stocks is an effective guide for OPEC oil output policy.

All changed in May when President Trump announced the US

withdrawal from the Joint Comprehensive Plan of Action (JCPOA) and
Saudi Arabia welcomed the decision.
Sharp shift in Saudi Arabia’s oil output policy in May: Saudi Arabia
showed signs of willingness to ease the supply curbs and declared that it
is willing to do what is necessary to reassure consumers.

Saudi Arabia ramped up its production and exports in June pre-

empting any losses from Iran and before engaging in renewed
negotiations about output allocations ahead of the December OPEC
meeting.

Source: JODI, IEA, OIES

 Ambiguous signals and multiple U-turns

Oil market sentiment turns sour Daily Brent price and information signals, Jan – Dec 18

Fears of oversupplying the market, and fall in the oil price in June
and July 2018 especially in light of the risk of trade war escalating.

But as prices started rising again in August and September 2018,

Saudi Arabia increased output to record levels with production reaching
11.1 mb/d in the November, an increase of 1.0 mb/d from May level.

U-turn in US policy regarding waivers, growing concerns about the

global economy, and sharp price reaction required a change in stance.

By November, the Kingdom was not only facing a surprising

move by the US to grant Iran oil waivers but also the widespread fears
about the health of the global economy and hence, the prospects of
global demand.

Another U-turn: Saudi Arabia reached an agreement with other

producers to cut output in 2019 in attempt to balance the market.

Data: OIES
 Another U-turn in 2019? Not likely

Saudi behaviour evolves in a dynamic context US crude imports from Saudi Arabia, Jan 11 – Mar 19

Saudi Arabia has been sending strong signals about balancing the
market. Production in January 2019 was 10.2 mb/d and expected to
reach 9.7 mb/d in April, a 1.3 mb/d decline from November 2018 level.
Focus also on exports particularly to the US.
But some in the market are sceptical about Saudi Arabia’s ability to
maintain its current production.

Why would the Kingdom not reverse its output policy yet again and
increase production under Trump’s pressure?

In 2018, Saudi Arabia faced hard choices and unique circumstances

which may not necessarily be repeated in 2019 (i.e. US mid-term
elections, doubts about its ability to increase output, Iran waiver policy).
Domestic factors also count and shape its oil policy.
Ambiguous signals from the US regarding Iran waiver policy will
make Saudi Arabia more cautious in reversing its output policy, unless
prices rise sharply.

Source: EIA, OIES

 OPEC+ cutback deal in full force
OPEC+ compliance, Jan 17 – Feb 19
OPEC+ compliance in February 2019 reached 80%, with
OPEC delivering at 95% due to the deep cuts from Saudi
Arabia, while Iraq and Nigeria continue to miss their target,
and NOPEC producers gradually adjusting output (47%).
Saudi Arabia and Russia actual cuts, Jan 17 – Feb 19
Overcompliance from Saudi Arabia neared 0.2 mb/d
beyond pledged, while Russia continues to struggle with
meeting its target (35%). This time around compliance rates
cannot get much boost from involuntary cuts, with the only
exceptions - Angola and Nigeria; albeit limited.
Source: OIES
 US foreign policy complicates OPEC policy
OECD stocks v 5-year avg in trade war scenario, OECD stocks v 5-year avg in OPEC policy reversal scenario,
Jan 17 – Dec 19E Jan 17 – Dec 19E

It is the US and not OPEC that holds most of the wildcards Similarly, if OPEC where to reverse its output cuts in
that could shape market outcomes in 2019. For example, a response to the pressures from Trump, and the US decides
further escalation in the US-China trade tensions may cause to extend the Iran waivers, this may again hamper OPEC’s
a significant build-up in stocks. efforts to rebalance the market in a similar fashion to 2018.

Source: OIES
 Geopolitics weigh on OPEC policy too
OECD stocks v 5-year avg in Venezuela scenario, OECD stocks v 5-year avg in Iran scenario,
Jan 17 – Dec 19E Jan 17 – Dec 19E

Further output losses from Venezuela and Iran may clear These developments are beyond OPEC’s control and are
the stocks overhang, but at the same time may confuse the highly unpredictable, which complicates its output policy.
signals.

Source: OIES
 US shale factor: Also fading?
Permian production profile, Jan 07 – Feb 19 Permian drilling activity and productivity, Jan 07 – Feb 19

To offset the declines in productivity and higher declines But the lower oil price environment and companies operating
from legacy wells, US shale companies need to drill and within cash-flow implies that rig activity will stabilize at
complete more wells, which requires higher expenditure. current levels without sharp price increases in the near future.

Source: EIA, Baker Hughes, OIES

 US shale factor: Slower but still strong
Permian oil production, Jan 17 – Feb 19 Drilled v completed wells in the Permian, Jan 14 – Feb 19

Month-on-month production growth of Permian shale is The gap between drilled and completed wells has widened,
expected to slowdown in 2019 relative to a year ago, but the reflecting infrastructure constraints and possibly explaining
yearly average growth will still be high. the perceived decline in productivity (barrels per rig).

Source: EIA, OIES

 Permian growth outlook reinforced by majors
Permian resources by company, 2017 v 2019 Chevron and ExxonMobil capex plans in the Permian

Source: Financial Times

The increased presence of US majors in the region and The increased focus in short-cycle investment projects, has
dramatic production growth plans are expected to boost led both Chevron and ExxonMobil to ramp up their capex
Permian growth in the medium-term. plans in the region and to seek to bring on stream a total of
4.0 mboe/d of new production between 2019-2025.

Source: FT, Argus, OIES

 Massive shift in trade flows
US crude exports by destination, Jan 14 – Dec 18 Chinese crude imports by origin, Jan 14 – Jan 19

US crude exports continue to rise, having reached record Massive shifts in trade flows as exports from Saudi Arabia
levels in 2018. Asia and Europe have become the main to the US fall and Chinese imports of US crude are also in
destinations for US exports competing with many decline as a result of the US-China trade dispute.
traditional exporters to these regions.

Source: EIA, Argus, OIES

Against a background where geopolitical risks continue to
trend upward
 Geopolitical risks continue to trend upward
Geopolitical risk index, Jan 10 – Mar 19 OPEC supply disruptions, Jan 10 – Jan 19

Geopolitical risks will continue to weigh on the oil market Ending 2018, geopolitical supply disruptions from OPEC
outlook in 2019 due to the deepening crisis in Venezuela, neared 3.0 mb/d, with Venezuela and Iran accounting for
the Iranian oil sanctions, the eight-year transitional limbo in almost 80% of the total (at 2.3 mb/d). The largest loss of
Libya and the volatile situation in the Niger Delta. OPEC supplies since the Gulf War in 1990/91.

Source: Caldara & Iacoviello (2018), OIES

 Venezuela prospects more uncertain
Political and economic crisis deepens Venezuela supply profile, Jan 14 – Feb 19

The political and economic crisis in Venezuela cloud the country’s

production prospects both in the short- and medium-term.
The latest round of US sanctions targeting Venezuela’s oil sector
plunged PdVSA into crisis, accelerating production declines and posing
significant challenges for the recovery of the industry in the long run.
Due to the volatile political situation, forecasting output is very difficult
but many expect sharp declines in 2019 similar to 2018 (-0.57 mb/d).
Production capacity is expected to fall to 0.75 mb/d from 1.35 mb/d in
2018 as drilling activity and investment are at very low levels.

Ending-2018, foreign investment pledged to raise output by 1.0 mb/d, alas

such investment plans are met with much scepticism.

Key dates of Venezuelan oil sanctions 27 Jul

Authorization for all
23 Jan 28 Apr
operations with PdVSA
Juan Guaido claims the interim All transactions and to this date expires for:
presidency of Venezuela Jan - Apr activities that include the CITGO, Chevron,
purchase and importation Halliburton,
28 Jan Wind down
of petroleum from PdVSA Schlumberger, Baker
US expands sanctions on Venezuela, period Hughes, Weatherford.
are barred from this date.
targeting PdVSA

January February March April May July

Source: IEA, Baker Hughes, OIES

 Venezuela’s production outlook remains bleak
Production scenarios for Venezuela, Jan 16 – Dec 19E Venezuela production by quality, Jan 14 – Dec 19E

Annual declines in 2018 reached an all-time record of 0.56 Apart from filling the supply gap, a significant challenge for
mb/d y-o-y and the declines this year are expected to be as the oil market is to find new barrels in the heavy sour
aggressive. Ending-2019, production is expected to fall in category to offset the losses from Venezuela and resolve
the range of 0.6 – 0.8 mb/d; recovery potential is limited. the intensifying crude quality imbalance.

Source: OIES
 Limited capacity to prevent the production declines
Venezuela crude exports by destination, Jul 17 – Jan 19
Source: CSIS
mb/d
Prior to the US sanctions, approximately one-third of
Venezuela’s crude exports were destined for the US. With
the loss of the US outlet due to the sanctions the key
question remaining is whether the country can find other
buyers and divert its crude elsewhere?
US imports of crude oil from Venezuela, Jan 11 – Mar 19
The failure to move these barrels as well as inadequate
storage and further sanctions (e.g. secondary sanctions
targeting foreign companies doing business in Venezuela)
may accelerate the country’s production declines further.
Source: CSIS, EIA, OIES
 Turning point for Iran
Re-imposition of US sanctions blocked Iran’s recovery Iranian oil production, Jan 10 – Feb 19

The re-imposition of US sanctions on Iran has profound consequences

on the country’s oil sector, which prior to the sanctions was expected to see
the fifth biggest capacity expansion in the world.

Even before the US sanction regime was in full force in November

2018, all IOCs operating in Iran abandoned the country and both production
(-1.1 mb/d) and exports (-1.4 mb/d) fell sharply.

The surprise move by the US in November 2018 to grant exception

waivers to eight Iranian buyers has stabilised the output and exports decline,
which witnessed some increases in January and February 2019 (20,000 bpd
and 370, 000 bpd since December respectively).

Looking ahead the US policy of uncertainty with regards to the extension of

the oil waivers past their 180-day expiration in May looms large.

Despite the US officials position that they are not looking to grant waivers,
the extension of waivers is not excluded amid price concerns.

That said, the US sanctions are already inflicting severe economic,

political and social damage on Iran, while at the same time they are
considerably weakening Iran’s short- and long-term oil market positioning.

Source: IEA, OIES

 Highest degree of sensitivity to US sanctions
Iranian output disruptions, 2018 v 2012 Iran production by quality, Jan 14 – Dec 19E

Between May and December 2018, Iranian production was This development led to the loss of about 1.1 mb/d
lower by more than 1.1 mb/d despite sanctions with medium sour Iranian barrels from an already tight market
exceptions being enforced only in November, matching the of heavier crudes, that upon the expiration and no renewal
cumulative losses in 2012 under the pre-JCPOA sanctions. of waivers may potentially reach 1.6 mb/d ending-2019.

Source: OIES
 For the moment, the market is ignoring the spectre of In the immediate aftermath of the December Opec/non-
oversupply to the extent of greeting news of bearish US
Wide-ranging repercussions for Iran Opec meetings, there was some talk that the agreed cuts
would not be enough to match actual output with the
IranianExports
crude of exports
Iranian crude
by by country
destination, May 18 mn–b/dDec 20Eimplied call on OpecIranian
crude — GDP
in othergrowth,
words, the 2010
level – 2023E
3.0 of production that results in a balanced market and zero
China India Japan Korea Taiwan EU-Turkey Other
Thousands

— Argus tanker tracking, estimates for global stock change. But this has never been our assess-
2.5
November-December 2018, forecast
from January 2019 onwards
ment. As we pointed out in the most recent edition of
Source: Argus Argus Fundamentals, we believe that market fundamentals
2.0 in 2019 and beyond now look relatively well balanced. We
assume that Opec will deliver the full 800,000 b/d cut and
mb/d

1.5
that Russia will reduce production by 200,000 b/d in the
first quarter of this year, although other non-Opec partici-
1.0
pants to the deal will fail to deliver. We also allow for the
coincidental 300,000 b/d contribution from Canada in the
0.5
first quarter. But what tips the market towards balance by
0.0 mid-year is our expectation that Iranian exports will be
May 18 Sep 18 Jan 19 May 19 Sep 19 Jan 20 May 20 Sep 20 sharply lower (see chart).

Ending-2018, Iranian exports fell more than 1.4 mb/d Sanctions are inflicting severe damage on Iranian economy which

Petroleum
from May before slightly increasing in 1Q19 due to the is projected to witness a negative growth in 2018/19 of -1.5%
exception waivers. If however the US waivers are not and -3.6%, compared to the pre-sanction growth projections of
renewed, exports could fall sharply again. 4% each year, creating considerable challenges for Iran’s economy
illuminating the markets and political
Available on thestability.
Argus Publications App
Source: Argus, IMF, OIES
 Divisions threaten Libya’s recovery
Libya’s production rebound remains fragile Libya’s key oil and gas infrastructure

Libya’s oil production more than doubled since 2016 and Source: MEES
in 2018 reached its highest level in five years at 1.15 mb/d.

The ongoing unrest and divisions on the ground hamper

the ability of the country to put an end to an eight-year long
conflict and attract foreign investment which is central to the
recovery of its oil production.

The long awaited so-called Libya Peace Conference in April

could set the path towards a unified Libya, but such hopes are
met with scepticism due to a fragile balance of powers.

The recovery of oil production in 2017/18 however

encouraged IOCs to return to the country and invest in
repairing infrastructure, recovering current production, as well
as expanding production capacity.

That said, the political and security outlook is still

expected to constrain investment in the next five years, albeit
not as severe as in the recent past.
Stability in Libya remains crucial to the recovery of its oil
sector to pre-crisis levels and to capacity expansions.

Source: MEES
 Political and security situation limits growth
Libya oil production, Jan 10 – Jan 19
Libya’s oil production in 2018 recovered to above 1.0 mb/d
for the first time since early-2013, but it still remains a long
way from a sustainable recovery above this level and
reaching the pre-crisis level of 1.5 mb/d. In 2019, upside
potential is highly vulnerable and expected to halt.
Libya sustainable production capacity, 2015 – 2024E
Despite the relative success of Libya’s NOC to revive oil
output in the face of security difficulties and recent return
of IOCs, growth returns in the next five years are relatively
limited to 1.27 mb/d. That is as long as the political and
security conditions do not improve.
Source: IEA, OIES
 Nigeria’s long-standing transformation
The trend in Nigeria is one of oil output stagnation Nigeria supply profile, Jan 10 – Feb 19

Nigerian production in 2018 recovered to 1.6 mb/d, although the

recovery has been vulnerable to militant attacks in the oil rich Niger Delta.

In 2019, production capacity is expected to increase to 1.8 mb/d due to

the start-up of Total’s offshore deepwater Egina project which is estimated to
add between 200-220,000 bpd.

At the same time, the newly elected government faces significant

challenges in sustaining Nigeria’s upstream production, having to prevent
fresh outbreaks of militancy and violence in the Niger Delta and most
importantly secure new upstream investment.

So far the attempt by the government to renegotiate PSCs and increase

royalty payments has led to fresh investor uncertainty.

IOCs maintain divested interests with projects remaining long-stalled,

such as deepwater projects that are expected to add up to 325,000 bpd of
new production (e.g. Bonga Southwest/Aparo, Zabazaba/Etan).

Unless Nigeria’s oil sector finds a boost from within, oil production is set to
continue its declining trend and upstream spending will eventually dry up.

Source: IEA, Baker Hughes, OIES

 One step forward, two steps back
Oil projects counts and proposed capex for 2018/25 Nigeria sustainable production capacity, 2015 – 2024E

Although Nigeria accounts for half the proposed capex on The launch of the Egina project in 2019 is expected to
new oil/gas projects in Africa over the period 2018/25, the boost the country’s crude capacity in the near-term to 1.8
slow pace of FIDs on these projects is indicative of the mb/d, but growth is expected to reverse to 1.7 mb/d in the
lack of a decisive progress in its oil sector’s transformation. medium-term due to underinvestment.

Source: Global Data, IEA, OIES

The sweet-sour imbalance
 Quality spreads have been highly volatile
Brent-Dubai spread, Jan 18 – Mar 19 Urals-NSD spread, Jan 18 – Mar 19

OPEC output cuts and supply disruptions in Iran and With some crude such as Mars and Urals occasionally
Venezuela are tightening the medium/heavy sour market trading at a premium relative to their benchmarks,
narrowing the discount of Dubai against Brent. indicative of the stronger pricing of heavier grades.

Source: Argus, OIES

 US light sweet crude to widen the quality gap
Global growth of light sweet production, Jan 14 – Dec 19E Global production growth by quality, Feb 19E – Dec 19E

The rapid growth of light sweet supplies out of the US is The heavy sour crude shortage is unlikely to be resolved in
expected to continue into the foreseeable future, 2019, as OPEC embarked on a fresh round of output cuts
aggravating the crude quality imbalance. amid growing US shale supply and further losses of heavier
barrels expected from Venezuela and Iran.

Source: OIES
 Crude quality concerns
Growth of global production by API gravity, Jan 12 – Jan 19 Growth of global production by sulphur content, Jan 12 – Jan 19

Since 2012, most of the global production growth has been Likewise, the production growth of sweet crude has been
concentrated in light sweet crude from the US, surpassing higher than that of sour crude and after a decline in 2016
that of heavier grades (i.e. medium/heavy crude) by as when US shale production momentarily halted, is once
much as 2.6 mb/d in January 2019. again hovering higher than the sour grades in 2019.

Source: OIES
 to a new fuel. It2.4
will take time for VLSFO to displace marine
2.0 0.8
gasoil. In our foreca
IMO2020 will only complicate matters
eases progressively
1.6 from a record 2 mb/d in 2020 to 1.8 mb/d by 2024.
1.2
0.4
0.8
HSFO, LSFO and Gasoil swaps, Mar 19 – Jun 22 Bunker fuel oil demand,
0.4 Figure 4.2
2015 -2024E Bunker fuel oil demand before and after 2020
0.0 0.0
mb/d 2015 2018 2021 2024 mb/d 2020 2021 2022
BunkerHistorical
HSFO Demand Forecast
Post-2020 Bunker HS
Scrubbers Non-com
4.0 1.6
3.6
3.2
1.2
2.8
2.4
2.0 O IL M ARKET R EPORT 2019 0.8
1.6
1.2
0.4
0.8
0.4
0.0 0.0
2015 2018 2021 2024 2020 2021 2022
Source: IEA
Historical Forecast Scrubbers Non-com
HSFO has been performing quite well recently with the IEA estimates a fall of HSFO demand from 3.5 mb/d to
spread to LSFO reaching low levels. But these differences 1.4 mb/d between 2019 and 2020, with the 2.1 mb/d
are expected to widen ending-2019, as IMO rules are difference projected to be met by a 1.1 mb/d increase in
implemented and bunker fuel oil demand falls after 2020. MGO and a 1.0 mb/d increase in VLSFO.

Source: CME, IEA, OIES

 Diesel margins have to rise to incentivize runs
Gasoil-Brent swaps, Mar 19 – Jun 22 OECD middle distillate stocks, Jan 15 – Jan 19

Refineries may have to increase runs to supply more diesel OECD middle distillate stocks are at relatively low levels
but this means diesel margins may need to rise and do most and therefore the buffers may be thin if gasoil demand rises
of the heavy lifting. above expectations.

Source: CME, IEA, OIES

 new IMO bunker rules
expectedapproach
to grow quickly togrades, refinery turnarounds and falling stocks. But a spring revival in gasoline
3 000
820 kb/d at the end of that year. Growth will slow down markedly
3 000
afterwards as retrofits dropmargins is not always a precursor to a strong summer market.
to zero. By end-2024, fuel oil demand from ships with scrubbers will
Gasoline margins may
reach 1.05 mb/d, 2 000 also strengthen
a seven-fold increase versus the end of 2018. 2 000
1 000
January is traditionally the low point for demand, but this year the drop from
1 000
Figure 4.7 0 Forecastthe fourth quarter was less than in previous years. US drivers have enjoyed a
USGC gasoline margins, Jan 18 – Mar 19 Forecast scrubber installations, 2019 -2024E
scrubber installations by vessel category 0 and type of investment
US Gulf coast gasoline margin
Ships with scrubbers Oil winter of low pump prices. Average retail prices in January-February were the
2019 2020 2021 2022 2023 2024
Tankers Bulk Carriers Containerships
2019 2020 2021 2022 2023 2024
$/bl Cruise LPG Other Retrofits New builds
cheapest since 2016. Yet demand has remained lacklustre, with gasoline the poor
Source: Argus
6 000 6 000
25

20 5 000 relation to distillate sales. Now pump prices are up by over 30¢/USG since
In our model, we have assumed that 75% 5of000all installations happen in the oil and dry bulk tanker
15 4 000 LLS = 0 segments. Thismid-February, reflecting higher crude prices and the cost of producing summer-
is because of the size of these 4 000 fleets compared to other categories, with a high
proportion of large ships with significant fuel consumption, and thus a high interest in using a low-
10 3 000
grade gasoline. Volatility constraints during warm weather mean that cheap
cost feedstock such as high sulphur fuel oil. 3 000
5
blendstocks such as butane must be replaced with more expensive components.
2 000 2 000
Compliance issues Gulf coast gasoline margins have more than doubled since they reached a
unlikely to last
0
1 000 1 000
four-year low at the end of January, and the price of blending components such
-5 We expect non-compliance, the illegal use of fuel oil after 2020, to be relatively high at around
0
Jan Mar May Jul Sep Nov Jan16%Mar as alkylates and reformate are now more than $20/bl above crude, signalling
of total bunker demand in 2020, equivalent 0 to around 700 kb/d. In some cases, ships may burn
18 2019 192020 2021 2022 2023 2024 2019 2020 2021 2022 2023 2024
fuel
Oil Tankers oil to Bulkfirmer demand for high quality blendstocks to make summer gasoline. Yet the
avoid paying
Carriers for the more expensive
Containerships VLSFO or MGO. In others, they may not be able to find
Source: IEA
Cruisecompliant fuel
LPG and may therefore
Other be “forced” to use Retrofits
fuel oil. It is also New builds
possible that enforcement by
If low-sulphur Vacuum Gasoil (VGO) is diverted somefrom the outlook for gasoline consumption remains bearish as US consumers are hit with
governments will be patchyHSFO at the beginning.
may also receive support if scrubber installations
gasoline pool to create compliant fuel oil, gasoline margins
are expected to rise.
However, we do sharp increases at the pump. The EIA expects demand to rise by just 30,000 b/d
not think that increase and/or if HSFO finds its way into the power
non-compliance will be a lasting phenomenon. This is because the
sector, but for that to happen, it has to be priced
In our model, vastwe have
majorityassumed that 75%
of commercial seaof all installations
voyages happen
typically occur betweenin thelocations
oil andwhich
dry bulk tanker to
are committed
Market markers segments. Thisenforce the IMO
is because
this year. Globally, gasoline sales are under pressure from slower economic
of regulations,
competitively.
the size ofe.g.these OECDfleets
countries, China, Chinese
compared to otherTaipei, Singaporewith
categories, and South
a highAfrica.
In 2018, we estimategrowth, rising fuel efficiency and cuts to price subsidies.
that 85% of oil flows, 93% of coal voyages and 94% of iron ore tripsSource: either
Argus, IEA
 Sweet/Sour differentials should widen but supply also matters
Brent-Dubai spread in extreme shortages scenario, Net impact on the BD spread in extreme shortages scenario,
Jan 17 – Dec 19E Feb 19E – Dec 19E

While crude differentials are expected to widen as refineries The exacerbation of heavy sour crude shortage due to
increase their demand for lighter sour crudes, the OPEC output cuts and disruptions of heavier grades may
implementation of the IMO2020 ruling is not the only keep differentials narrow and even widen the BD spread
factor affecting sweet-sour crude differentials. into negative territory, affecting refinery margins.

Source: OIES
Global economy and oil demand: A key uncertainty
 solar panels, washing machines, steel, aluminum, and a
–4 90 WORLD ECONOMIC OUTLOOK: SUBDUED DEMAND—SYMPTOMS AND REMEDIES
2012 13 14 15 16 17 Aug. 2012 13 Scenario
14 15 16 17 Aug.
Box 1. Tariff
range
WORLDScenarios
ofSUBDUED
Chinese
(continued)
products, plus retaliation by trading
The global expansion has weakened
18 18
ECONOMIC OUTLOOK: DEMAND—SYMPTOMS AND REMEDIES
partners has complicated global trade relations.1 While
demand (not shown) owing to the hit to country B’s cenario Figure 2. A orld ide Increase in

GDP Growth
income from lower foreign demand for its exports. the preliminary agreement between the United States
Protectionism
Global GDP growth, 1H11 – 2H19E The result is an improvement in countryScenario Box
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global
CHAPTER
difference from baseline, unless noted
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GLOBAL PROSPECTS 2015 AND – 2019EPOLICIES
(Annualized semiannual percentposition, change)which helps moderate and Mexico on some bilateral trade issues has been a
the decline in GDP
Scenario Box 1. Tariff Scenarios (continued)
otherwise)
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step forward, the future of the trilateral North Amer-
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 OECD economies losing momentum?
US Treasury yield curve, Jan 14 – Feb 19 Eurozone PMI and GDP, Jan 99 – Mar 19

Source: IHS Markit

The 10-year yield fell sharply and reached below the 3- The Eurozone PMI has also been fading with the recent
month yield, which many consider as a very bearish factor declines primarily driven by weak activity in German
and a predictor of recession. manufacturing, particularly in the automotive industry.

Source: Federal Reserve Bank of New York, IHS Markit

 Concerns about China’s economic outlook
BRICS projected economic growth, 2016 – 2020E Chinese economic indicators, Jan 14 – Dec 18

Industrial output YoY Fixed-asset investment YTD YoY Retail sales YoY

Percent
2014 2015 2016 2017 2018

Source: Bloomberg

China’s economic growth in 2018 declined to 6.6% its
lowest rate in three decades. The Chinese economy is
expected to slow further in 2019 to 6.2%, casting a dark
cloud on the oil market outlook.
The ongoing trade tensions with the US, and recent decline in
exports growth amid deleveraging are all sources for concern. Yet to
be seen whether the government’s efforts to stimulate the economy
through monetary and fiscal policy will have the desired effects,
albeit this could run against much needed deleveraging.
Data/Source: World Bank, Bloomberg
 Oil demand not showing strong signs of deceleration
Global oil demand, 1Q17 – 4Q19E OECD and non-OECD oil demand, 1Q17 – 4Q19E

Global demand growth in 2019 is expected to remain After a sharp decline in 4Q2018, OECD demand in 2019 is
robust at 1.4 mb/d on a year ago, despite the downward expected to grow at a similar rate to last year at 0.3 mb/d.
revisions to global growth prospects. Emerging economies Non-OECD economies will post the largest growth adding
are set to lead the growth. 1.1 mb/d, despite a deceleration in China and India.

Source: IEA, OIES

 Diesel demand leading the growth
Global diesel demand, 1Q17 – 4Q19E OECD and non-OECD diesel demand, 1Q17 – 4Q19E

Diesel demand continues to lead the growth especially in Diesel consumption is expected to post gains in non-
the OECD. In 2019, diesel demand is expected to grow 0.5 OECD regions. In the OECD and particularly Europe,
mb/d higher than 2018. diesel consumption is expected to decelerate.

Source: Argus, OIES

 Gasoline demand the weakest link
Global gasoline demand, 1Q17 – 4Q19E OECD and non-OECD gasoline demand, 1Q17 – 4Q19E

Global gasoline demand growth in 2019 is expected to The rate of gasoline demand growth in OECD will
continue its decline, near 0.15 mb/d y-o-y, as gasoline sales continue its steady decline. Most of the growth will come
are under pressure from slower economic growth, ongoing from the non-OECD, but outside China, which implies that
fuel efficiency improvements and cuts to price subsidies. Chinese exports will remain large.

Source: Argus, OIES

Oil price paths in 2019
 Balance of risks in 2019
Price risks are broadly balanced Balance of risks to the baseline forecast, Jan 17 – Dec 19E

+ Upside risks can push prices above $70/b ending-2019.

⇡. Further disruptions in Iranian oil output (ASM: -0.5 mb/d).

⇡. Venezuela’s output continues to deteriorate (ASM: -0.4 mb/d).
⇡. Libya and Nigeria remain a wildcard (ASM: n/a).

⎻ Downside risks could supress prices towards the low-$40/b.

⇣. US shale growth surprises on the upside (ASM: +0.3 mb/d).

⇣. Larger-than-expected slowdown of global growth (ASM: 3.2%).
⇣. Concerns about health of emerging economies.

Balance of Risks 2019

Price outcomes (USD/b) Baseline Annual AVG Change from BASE

Geopolitical risks (Iran) 59.2 63.6 4.4

Geopolitical risks (Venezuela) 59.2 63.5 4.2
US shale growth risks 59.2 58.0 (1.3)
Global growth risks 59.2 49.3 (10.0)

Data: OIES
 Oil price paths in 2019

Prices to recover, but upside potential is limited to $70-80/b range Oil price paths in 2019, Jan 17 – Dec 19E

Reference assumptions Reference

OPEC+ output adj. +1.27 mb/d
(as of January 2019) (100% target compliance)
Global economic growth +3.5%
Geopolitical disruptions -0.8 mb/d
Of which: Iran - 0.5 mb/d (as of May 2019)
Venezuela - 0.3 mb/d
US shale output growth +1.1 mb/d

Price outcomes (USD/b)

2019 2019
Reference Brent Prospect
AVG Q/Q chg. AVG Chg f/ REF
1st Quarter 60.6 (6.9) 60.0 (0.6)
2nd Quarter 67.9 7.3 65.6 (2.3)
3rd Quarter 68.4 0.5 60.8 (7.6)
4th Quarter 74.3 5.8 65.1 (9.1)
Annual AVG 67.8 (3.3) 62.9 (4.9)
* The Brent Prospect forecast considers over 20 combinations of forecast scenarios
and derives the conditional price outcome to the reference case.

Data: OIES
 Oil market set to return to a balanced mode in 2019
OECD stocks v 5-year avg in reference scenario, OECD stocks v 5-year avg in pessimistic scenario,
Jan 17 – Dec 19E Jan 17 – Dec 19E

OECD stocks are expected to be drawn significantly in the The market rebalancing however remains highly sensitive to
second half of the year due to the high potential of supply potential risks that could sustain and even aggravate the
disruptions in Iran and Venezuela, that combined with stocks overhang pertaining to weaker demand, higher non-
supportive demand is expected to clear over 200.0 mbbls. OPEC supplies and further US foreign policy reversals.

Source: OIES
 Oil Price Paths in 2018:
y bertween OPEC, US Shale
and Supply Interruptions
Bassam Fattouh, Director OIES
Andreas Economou, Senior Research Fellow OIES
Brent prices breaking through $70 a barrel for a
April 2019
chmarks flipping into backwardation. Yet, there is
th very divergent views among market observers
8, with some revising upwards their forecasts to
d that the market fundamentals can sustainably
th in the mid $60/b. The key uncertainties behind
ws about:
Oxford Institute for Energy Studies
t cut agreement reached in November 2016;

rise;
The contents of this presentation are the authors’ sole responsibility. They do not necessarily
represent the views of the Oxford Institute for Energy Studies or any of its Members.
al oil demand;

eopolitical environment.
ce path could evolve in 2018 by evaluating the
et using a structural model of the oil market and
cenarios are not predictions of what will happen,
risks conditional on certain events that are known
al events. Our reference forecast scenario projects
a price floor at above $60/b and a ceiling of below
aseline forecast suggests that the momentum of
NOPEC output cuts have tightened the oil market
rket dynamics, the oil price will continue to be
for 2018, US shale output growth will be the key
disruptions could provide some support to the oil
uting the biggest geopolitical risk that could push
ecasts. The results also show the paramount
experienced in 2017 to carry on into 2018 for
. Finally, our results show that for OPEC/NOPEC
nd their output cut until the end of 2018; releasing
ould result in a sharp fall in oil prices, suggesting
winding the output cut agreement when they next