Crude oil looks set to stage rebound in 2019

Dubai - Opec cuts and US sanctions on Iran to lift oil prices this year.

Renewed sanctions on Iran will create an upside risk on oil prices in 2019, but the extent of the rise depends on whether the US can prevent Iran from selling oil to buyers in Europe and Asia, experts said.
A decline in Iran's oil output will keep prices slightly buoyant, with dated Brent blend expected to average $75.5 per barrel in 2019, up from an estimated $73.2 per barrel in 2018, they predicted. The Opec and its allies are set to cut production by 1.2 million barrels per day from today that will also help a rebound in oil prices during the first quarter of 2019. Most analysts expect sanctions would cut Iran exports by at least half in 2019 once the embargo would be fully implemented after the expiry of the waiver period in the next five months. However, they anticipate that weaker demand growth and robust non-Opec supply would mitigate the impact on oil prices.
"Should Opec continue with the production cutback strategy, oil prices are expected to move towards $65 by mid-March and strengthen exponentially further after the Iran sanction wavier expires," said Mihir Kapadia, CEO of Sun Global Investments.
However, if Opec fails to agree on maintaining the cut back, prices may even recede to $40s in the next five months. It is definitely a critical crossroad," he added.
The Economist Intelligence Unit (The EIU) predicted that Iran's crude oil exports would fall by about half in full year 2019 to 1.2 million barrels per day due to re-imposed US oil sanctions.
"Market concerns about weaker demand growth and strong non-Opec supply will, however, reduce the impact of these sanctions on oil prices," EIU said.
"In the short to medium term the oil market does look well-supplied, but if the cuts to Iranian exports go far deeper than forecast, and do last well into the long-term, supply losses elsewhere, such as in Venezuela or Libya, could still make the oil market vulnerable to upside risk," said Peter Kiernan, Lead Analyst, Energy at The EIU.
The EIU expects that Brent prices will average $73.2 per barrel in 2018, and average $75.5 per barrel in 2019 compared with $75.2 and $76.8 previously.
"Anticipation of a slowdown in oil demand, renewed oil stockpiling in the US and the issuing of waivers for Iranian oil buyers US and the issuing of waivers have depressed market sentiment," Kiernan said, adding "yet Iranian volumes will still be key to watch throughout next year."
Pat Thaker, regional director of Middle east and Africa at the EIU, said to counter US measures, Iran has started to expand its unofficial exports, just as it did during the previous US secondary sanctions regime in 2012-15.
"Iran is hoping to export some oil through private domestic customers, it has already utilised 'ghost ships' which turn off on-board satellite tracking systems, and it is also likely to try and arrange barter deals. Russia has signalled that it may assist in buying Iranian oil for re-export," said Thaker.
In the short term, the US has also agreed to grant partial wavers to eight countries that import Iran's oil. However, buyers of Iranian oil have already cut imports from a peak of 2.8 million barrels per day in April to around 1.5 million barrels per day at present, and that number is likely to fall further, with the US set to reconsider waivers in six months' time, said Thaker.
Kapadia of Sun Global Investments said Iran importers would slowly switch away from Iran but the waiver ensures that this can be a smooth but not costless process. "For countries such as India and China a switch to importing from countries such as the US or Saudi Arabia will be costly as oil markets will once again be expected to tighten after the temporary waivers expire."
Oil markets are still under significant pressure currently due to changing global dynamics - the US emerging as the largest producer of oil, the US - China trade wars and the uncertainty relating to the outcome of the Opec meeting in December are all negative.
"Oil markets are extremely concerned about Opec's vision for next year as Opec is expected to decide on the production cut back strategy," said Kapadia.
Analysts said global consumption of petroleum products would increase by less than 1.5 per cent in 2019, down from 1.7 per cent in 2018, with the US, China and India all reporting slower growth.
Roger Matthews, senior trade lawyer in Dechert's international trade team, said the US has adopted a largely uncompromising line on compliance with its Iran sanctions. However, it has agreed waivers with a few countries clearing them to continue to import reduced volumes of Iranian oil without adverse US consequences, albeit only for a limited period and on terms that the purchase money is available for Iran to use only on certain essentials such as food and medicines. The eight countries benefitting from waivers are those for whom Iranian oil is critical to their economy, and it includes India, Japan, China South Korea and Turkey, among others.
"It is not clear how long the waivers will last, but the US administration remains clear that the goal remains to reduce Iranian exports to zero. However the grant of these waivers and the recent softer tone of rhetoric suggest some awareness that too rigid an approach may not be in the US's wider interests," Matthews said.
- business@khaleejtimes.com