Please note that next week's Perspectives will be published on Tuesday 23 April, owing to the Easter Monday holiday in the UK
The market is at a strange impasse. Contrary to last year, when the physical market did not send any signal to OPEC that a production increase was necessary, this year the market is crying out for more crude. Yet, this year OPEC is too busy undoing last year’s errors and has sent a very clear signal that it will not pre-empt any possible production losses from any country. OPEC will raise production reactively if need be, but prices have to go higher first before they do so.
With demand starting to stabilise, this leaves a huge amount of upside for prices and timespreads (outside WTI) at the very least through Q3 19, something the market is yet to wake up to. Consensus expectations are for Brent to be capped at $75 as Saudi Arabia starts to raise output.
The persistently cautious outlook from many is being supported by WTI spreads weakening and Brent-Dubai spreads widening, with the latter bringing into question the foundation of market tightness, which has been led by medium and heavy crudes. WTI’s rally was overdone and with possible Permian pipeline delays amid recovering production weighing on Midland differentials, we expect nearby WTI spreads to weaken to 25 cents contango and WTI-Brent to double digits.
Meanwhile, the strength in Brent-Dubai is largely a function of the reversal of gasoline weakness and fuel oil strength, with the latter driven by hefty outflows from the Middle East as devastating floods in the region have crimped power generation demand. As Middle Eastern summer demand rises, we expect fuel oil to pick up from next month and Brent-Dubai to narrow again, but headwinds for sour crude market are rising with IMO 2020 drawing near. Still, upstream losses from Venezuela and Iran will cap how much Brent-Dubai will widen by even in an IMO world.
|WTI and Brent prompt spreads, $/bbl||Singapore cracks vs Dubai, $/bbl|
|Source: Argus Media Group, Energy Aspects||Source: Argus Media Group, Energy Aspects|