We use this 'In Focus' to identify and analyse six themes that we believe will shape the oil world in 2019. In the coming weeks we will also publish a podcast version of this report.
Geopolitics – Apocalypse Now?
Increasingly hard-to-predict US foreign policy is contributing to erratic decision-making, particularly in the Middle East, which is spilling over to the Iran–Saudi Arabia rivalry. We assume Iran will produce 2.3 mb/d of crude in 2019, but this is at the mercy of US sanctions policy. Meanwhile, Congressional attempts to punish the Saudi royal family could have far-reaching consequences.
Macro – The Phantom Menace
Uncertainty around the dollar—and the trade war, compounded by volatility in broader markets—informs our view that global oil demand growth will slow to 1 mb/d y/y in 2019, although much will depend on the evolution of fractious US-China trade relations. We expect OECD oil demand to drop by 0.4 mb/d y/y and non-OECD oil demand growth to rise by 1.3 mb/d y/y in 2019.
Crude – Deliverance
Sour crudes are set to trade consistently above lights, amid the structural glut of light sweet crudes in the market, so Dated Brent–Dubai is set to invert. This means lighter crudes will aggravate the gasoline oversupply and weigh on cracks, necessitating trims in super light crude output. Even IMO 2020 doesn’t solve the problem for Dated as the sulphur content of Forties bottoms has risen.
US exports – Field of Dreams
US production growth will be loaded towards H2 19, coinciding with new Permian takeaway capacity coming online, including two former NGL pipelines being converted to flow crude. While many have been asking us whether or not USGC ports will have the capacity to cope with the incremental barrels, we think the bigger question is whether the world can absorb all the light crudes.
LPG/NGLs – The Towering Inferno
The lightest portion of the NGL barrel is in for a bumpy ride as US ethane is set for an encore of 2018’s volatility, with rejection economics and lagging infrastructure clashing with new demand. For LPG, Asia may struggle to absorb the wave of new supply from the US, Canada and Australia, and things will be even tougher if OPEC+ elects to end production cuts after June.
IMO 2020 – House of Flying Daggers
IMO 2020 is moving inexorably closer, forcing industry players to refine their plans. Q3 19 will see higher MGO demand amid low overall distillate stocks. Refinery works are picking up, but most focus on CDU and cokers, while FCC works are being delayed to 2020, as refiners think that it is better to sell VGO to make compliant fuels next year. This implies another lost year for gasoline.