Lack of conviction

Published at 12:00 17 Dec 2018 by

Please note that this is the last Perspectives of 2018. Normal service will resume on 14 January 2019. We wish our readers a prosperous 2019!

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The gamut of geopolitical events and Trump’s propensity to interfere in almost every matter possible has made it almost impossible to form a fundamental view about markets heading into 2019. Much of the risk and uncertainty for 2019 is frontloaded into the first half of the year: Iran waivers in May, OPEC meeting in April, US-China deadline in March, and obviously Fed meetings throughout. Without clarity on at least some of these issues, we expect choppy markets.

Demand is the biggest source of uncertainty for next year. A slowing global economy and hence oil demand growth reaching more sustainable levels has always been our base case for 2019. But the concern is around the US-China trade war, and despite the brief truce uncertainty is rampant, fuelling destocking. At the same time, the truce is preventing the Chinese government from undertaking stimulus to shore up growth. The risk is that global growth could slow sharply.

The other uncertainty for next year is around Iranian production and US policy vis-à-vis Iran, even though in reality, Iranian exports will probably hold around our original estimate of 1 mb/d, especially as countries that have received waivers struggle to lift Iranian crude due to payment and insurance problems. The evolving relationship between Saudi Arabia and the US Congress will also be a key defining feature of 2019, as will the path of rate hikes laid out by the US Fed.

The market will also have to deal with the initial fallout of IMO 2020. With recessionary fears mounting, availability of distillate even as most ships switch over to MGO initially is less of a concern, pushing Dec-19/Dec-20 gasoil spreads into contango. But both new diesel-biased refineries—STAR in Turkey and Jazan in Saudi—may be delayed, which will add to the volatility.

Global and Chinese PMI, index ICE Gasoil Dec 19 vs Dec 20, $/t
Global and Chinese PMI, index ICE Gasoil Dec 19 vs Dec 20
Source: Bloomberg, Energy Aspects Source: Bloomberg, Energy Aspects

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