Oil prices to stay above $62 despite supply surge, demand drop
Global oil prices are forecast to stay above $62 per barrel in 2019-20 despite a downward pressure on the back of a surge in non-Opec supply combined with a deceleration in demand growth, energy industry experts said.
Experts at the Institute of International Finance (IIF) predict Brent oil prices to average $65 per barrel in 2019 and $62 per barrel in 2020 although oil futures contracts as of August 7, 2019, indicated that prices would average $61.6 per barrel in 2019 and $56 per barrel in 2020.
BNP Paribas has cut its forecast for 2019 for US crude by $8 to $55 per barrel and for Brent by $9 to $62 per barrel, citing slowing economy amid the trade dispute.
However, most analysts said they still expect Brent oil prices to average $65 per barrel in 2019 and $62 per barrel in 2020 despite rising geopolitical tensions that could disrupt supply, as well as a growth in non-Opec supply coupled with a drop in global oil demand growth.
Garbis Iradian, IIF chief economist for Middle East and North Africa, said non-Opec supply, including the US, is likely to increase by 1.6 million barrels per day (mbd) in 2019 and 1.8mbd in 2020.
"Growth in crude oil production in other non-Opec countries is likely to accelerate in 2020. Output from offshore projects in Brazil and Norway, and easing of production curtailment policies in Canada, could produce an additional several hundred thousand barrels a day of crude oil in 2020," said Iradian.
The IIF sees global liquid fuels inventories rising by 0.15mbd in 2019 and 0.25mbd in 2020.
"The lower forecast for inventory builds reflects lower expected crude oil production in Opec+, in light of the July agreement between the 14 members of Opec and a group of 10 major non-Opec producers led by Russia to extend the oil production cut agreement through March 2020," said Iradian.
Last week, Opec lowered their global oil demand forecast for 2019 by 40,000bpd to one mbpd. Alongside this, they highlighted that the outlook is likely to be bearish throughout the remainder of the year, consequently sparking a pullback in the energy complex. Opec also highlighted challenges in 2020 as rivals pump more, building a case to keep up an Opec-led pact to restrain supplies.
On August 7, the US Energy Information Administration lowered its oil demand outlook for 2019 to one million barrels per day. The forecast comes on top of an oil market that already fears a slowing demand for crude. The EIA cut its 2019 oil demand growth forecast by 70,000bpd. Its 2020 forecast for global demand growth increased, however, by 30,000bpd to 1.43 million barrels per day.
Most analysts also see Opec's crude oil production declining by 2.1 mbd in 2019, due to strong compliance with the Opec+ supply cuts and sharp declines in Venezuela and Iran in the context of US sanctions. They predict that in 2020, Opec's production might flatten. Saudi Arabia has cut its production to slightly less than 10mbd in recent months, from a peak of 10.6mbd in October 2018.
"We expect Saudi oil production to decline from 10.33mbd in 2018 to 9.95mbd in 2019, and to remain flat in 2020. Iraq's compliance with the Opec+ agreement remains weak. Libya's production may decline amid ongoing civil conflict. However, Opec's crude oil production may increase in 2020 if Venezuela undergoes regime change, and if Iran and the US agree to renegotiate the nuclear deal," IIF said.
Ole S. Hansen, head of Commodity Strategy, Saxo Bank, said prolonged trade war carries the risk of sending Brent crude oil lower towards $50 per barrel while moves towards a solution could see it rally by $5-10. "These prospects help to explain the whipsawing nature of the current market with the price pumping and dumping in response to trade tariff headlines from Washington and Beijing."
Opec members have since last November cut production by more than three million barrels/day and are currently producing the lowest volumes in five years.
"Voluntary cuts led by Saudi Arabia and involuntary cuts from Iran and Venezuela due to sanctions have been the main contributors to this reduction in production. However, at $60 per barrel Brent crude remains below the levels most Opec members need to cover government spending," said Hansen.
Mihir Kapadia, CEO of Sun Global Investments, said although the global economy has been slowing for some time, the US-China trade dispute has certainly weighed heavily on it and would continue to do so with both countries counteracting one another's actions.
"Oil prices should continue to stabilise as reality will have sunk in, but will be drastically influenced if any new developments are to occur."
Experts are of the view that downside risks to oil prices include one or more of the following: significant increase in Opec supply beyond March 2020 if the current Opec + agreement is not extended; peaceful transfer of power in Venezuela, which could pave the way for significant recovery in the country's crude oil production; and acceleration of growth in US oil production due to further technological improvements and efficiency gains.
Upside risks to oil prices in the short term include prolonged and further cuts in Iranian and Venezuelan production; a fall in Libyan production due to the civil conflict; on the demand side, agreement on tariffs between the U. and China before end of this year, and (signals by the Fed of further interest rate cuts, which could spur higher global growth and thus higher oil consumption.