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With the physical market on fire, flat price should have been markedly higher even prior to the US decision not to renew Iran sanctions waivers. Dubai spreads are on their way to three-digit backwardation, while Brent spreads also look solid amid continuing supply underperformance.
And now, even demand is starting to look up as it seems the worst of the bad news for the global economy is behind us. Chinese activity is picking up, with Q1 19 GDP surprising to the upside. For China, the key is that monetary policy measures are starting to show signs of transmission into credit formation via bank loans and also, on the margin, to small- and medium-size enterprises.
The worst is also likely over for Germany, which has been dragging European growth lower, even if with a small lag. Helped by a weak base and with a warm winter now behind us, y/y demand comparisons should improve from Q3 19. There are other potential sources of upside surprise too, with both LatAm and Middle Eastern demand coming in stronger than expected over Q1 19, lifting our 2019 total global demand growth forecasts by 0.1 mb/d to 1.1 mb/d.
So, a much tighter oil market is now looming, with demand improving and the US keen to push Iranian exports to zero (though we believe they will stabilise around 0.6 mb/d as China keeps buying). The key here is that, notwithstanding increasing diplomatic pressure on Saudi Arabia to pre-emptively pump more, the market underestimates just how cautiously the Gulf producers will react to emerging fundamentals. The Saudis will step in to keep the market supplied, but only after the disruption becomes apparent. This should help restore confidence among the financial community, allowing Brent to climb to above $80 in the coming weeks.
|Eastern sour diffs to Dubai, $/bbl||Global demand, y/y change, mb/d|
|Source: Argus Media Group, Energy Aspects||Source: JODI, gov. agencies, Energy Aspects|