As OPEC and OPEC+ meet in Vienna, the outlook for the market is mixed, Ann-Louise Hittle, vice president, Macro Oils, at Wood Mackenzie said.
“Geopolitical risk means the supply outlook is tightening, offsetting the moderate weakening in oil demand growth thus far this year,” she said.
“We expect demand to increase 1 million barrels per day (b/d) in 2019, with a pick-up in the second half of the year after the weak growth in the first half. However, this is at risk if the US increases tariffs on its imports from China or other nations and global GDP weakens further.”
She added: “We expect OPEC+ will continue production restraint through the second half of 2019, rolling over the current agreement.”
However, worsening tensions between US and Iran adds potential for oil price volatility that could be tricky for OPEC members to manage.
Ms Hittle said: “There is a downside risk for oil demand through the rest of the year if the ongoing trade war intensifies.
“Our forecast assumes no further trade war escalation. On that basis, we expect a tightening in the supply and demand balance in the second half of 2019, which supports prices. Brent is forecast to average $68 per barrel for 2019 as a whole, and $69.50/b in the second half of 2019.”
She added: “OPEC compliance is strong, except for Iraq and Nigeria. In May this year, Saudi Arabia had cut its production by more than 0.8 million b/d from its October 2018 reference level. This is far more than required.
“Adherence to quotas is strong from United Arab Emirates and Kuwait, as well as Algeria and Congo. But Libya, which is exempt from production restraint, saw a recovery in its output in May to around 1.1 million b/d.
“Year-on-year, OPEC crude oil production for 2019 is expected to decline by 1.8 million b/d, with more than half of that reflecting the impact of US oil sanctions on Iran and Venezuela. Venezuela’s production was already in decline, but US oil sanctions are biting, with the country seeing a further 500,000 b/d fall in output since the beginning of the year.”
In 2019, Iran’s production is expected to fall by 1 million b/d year-on-year, as US oil sanctions cut into its oil exports, especially after waivers for consuming nations to import limited Iranian oil were ended in early May 2019. Together, Venezuela and Iran’s crude oil production in 2019 is forecast to fall 1.6 million b/d.
“Non-OPEC production — and US oil supply – are strong, but these losses to OPEC supply carve into global supply growth this year, leaving it at just 0.7 million b/d,” Ms Hittle said.
“The market also faces the uncertainty of the escalation of threats between the US and Iran. That would pose a supply risk in a 100 million b/d global market, with just 3.8 million b/d of spare productive capacity from OPEC. Only 1.8 million b/d of that spare capacity could be made available within a month.
“At present, OPEC has capacity to boost output by about 3.8 million b/d within nine months. Almost all of the 1.8 million b/d that could be brought to market within a month is held by Saudi Arabia, Kuwait and the United Arab Emirates. If a significant outage occurs, the ability of the global industry to meet oil demand will be at risk,” she said.
Source: Wood Mackenzie