Copyright of the Daily Oil Bulletin 2018
Analysis: Politics To Continue To Drive Crude Prices Through 2019
The jump in international benchmark crude prices in the fourth quarter of last year surprised most oil forecasters. Here at Geopolitics Central (GPC), we expected spot West Texas Intermediate (WTI) to rebound, having previously predicted the price to average US$62.50/bbl this year (DOB, Oct. 11, 2017) — but failed to see the speed in which prices would increase.
The late November extension of the OPEC/non-OPEC production pact to the end of this year caught the attention of crude oil speculators on both sides of the Atlantic powering prices higher, as has rising geopolitical concerns in the Persian Gulf region and elsewhere. Bullish speculative activity for WTI and Brent crude on the NYMEX and ICE future exchanges hit record territory in the week ending December 26. Net-long positions for combined futures and options contracts for WTI and Brent on the NYMEX and Brent on ICE reached a whopping 1,022,120 positions, representing more than a billion barrels of oil.
As a result, GPC has increased its forecast for spot WTI by US$2.50/bbl to $65/bbl in 2018 — compared to roughly US$50 last year and a cyclical low of $43.29 in 2016 — and is forecasting WTI to average $70/bbl next year, with politics a significant driver for oil prices throughout.
GPC is forecasting spot WTI to rise on strong oil market fundamentals and widespread geopolitical concerns through the first half of 2018, with spot WTI hitting $70/bbl before focus shifts to the scheduled unwinding of the 1.8 million bbls/d OPEC/non-OPEC pact and the potential implications of rapidly rising U.S. light tight oil (LTO) production. WTI is expected to drop back below $65/bbl by the end of the year.
On the fundamentals front, global oil consumption is projected to exceed global supply by 500,000 bbls/d in 2018, helping to push global oil inventories back down to normal levels by the end of the year. Global oil consumption is expected to increase a robust 1.52 million bbls/d to 99.86 million bbls/d, powered higher by relatively strong world economic growth and the so-called price effect following three years of low oil prices.
Non-OPEC supply is forecast to increase a substantial 1.58 million bbls/d to 60.24 million bbls/d this year, with U.S. oil production contributing 85 per cent of the growth. OPEC oil supply is expected to slip 160,000 bbls/d to39.12 million bbls/d — including almost seven million bbls/d of NGLs — with Saudi Arabia cutting more than its agreed 486,000 bbls/d share to support oil prices to help make the Initial Public Offering (IPO) of a five per cent stake in state-owned Saudi Aramco a success.
For 2019, GPC is projecting the global oil market to be in balance — with global consumption and supply both averaging 101.08 million bbls/d — with a resurgence in supply disruptions in a number of major oil exporting countries partially balancing against the return of OPEC/non-OPEC volumes post-production pact and contributing to relatively sparse spare capacity at a time of high geopolitical anxiety.
Global oil consumption is expected to increase a relatively modest 1.22 million bbls/d in 2019 — 370,000 bbls/d less than the 1.59 million bbls/d average since the oil price crash in 2014 — for two major reasons. First, the positive impact of lower oil prices gradually declines over time, with the price effect further diminished by rebounding crude oil prices. Secondly, numerous major oil exporting countries are slashing fuel subsidies to reduce budget deficits in an attempt to gain control over runaway oil consumption, with Saudi Arabia at the forefront of this movement.
Non-OPEC oil supply is projected to increase 1.48 million bbls/d to 61.72 million bbls/d in 2019, with U.S. oil production increasing a whopping 1.55 million bbls/d — nearing record 2014 growth of 1.75 million bbls/d that helped ignite the last market share war. Despite roughly 1.2 million bbls/d coming back onto the market post-production pact, OPEC oil supply is forecast to increase only 240,000 bbls/d to 39.36 million bbls/d next year because GPC is assuming about one million bbls/d of additional OPEC crude will go offline for geopolitical-related reasons — for example, Iran (new U.S. sanctions biting); Libya (post-election violence); Nigeria (rising separatism in Niger Delta region) and Venezuela (end game).
OPEC members suffered 2.2 million bbls/d of unplanned production outages in 2016 based on U.S. Energy Information Administration (EIA) data, leading to a meager 1.15 million bbls/d of OPEC spare capacity being available in case of emergency. OPEC outages have slipped to roughly 1.3 million bbls/d based on GPC calculations, with a commensurate increase in OPEC spare capacity, but based on our short-term outlook OPEC’s unplanned outages and spare capacity in 2019 should be similar to 2016 levels.
It should be noted that GPC sees two potential Black Swans lurking over the world oil market, one extremely bearish, but relatively unlikely, especially through 2019 — another Saudi-led oil price war — and one extremely bullish and somewhat more likely in the short term — a hot war between Saudi Arabia and Iran.
From our perspective, Saudi Arabia is likely to accept rapidly rising U.S. LTO production over the next two years for three reasons: Saudi Arabia should regain market share post-production pact at the expense of more geopolitically-challenged OPEC members; the kingdom needs to rebuild its financial reserves to help finance Crown Prince Mohammad’s ambitious socio-economic blueprint Vision 2030; and based on comments by the Crown Prince, it appears he's planning to sell additional stakes in Saudi Aramco following the IPO to help diversify the kingdom’s revenue sources and economy. Assuming U.S. LTO production continues its rapid rise post-2019 – and the LTO revolution possibly gains traction in other countries such as Argentina and Canada as well – another Saudi-led market share war becomes increasingly likely in the longer term.
The Cold War between Saudi Arabia and Iran has been heating up since the U.S. inadvertently pushed Iraq into the Iranian sphere of influence last decade by imposing democracy on the Shiite-majority country. As of now, Riyadh and Tehran are fighting proxy wars in Syria and Yemen, with Lebanon a likely new battleground. But, to date, Saudi Arabia has performed poorly in these proxy wars, with Iran continuing to expand its influence in the Middle East. This appears to have led Crown Prince Mohammad to deepen relations with the U.S. and Israel, either to confront Iran directly with the support of these powerful military allies — airstrikes and missile attacks, not a land invasion — or to bluff Iran into a respectful détente in the region to demarcate spheres of influence for each.