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The oil market has shrugged off escalating geopolitical tensions in the Middle East and chosen to focus on recessionary fears instead. While demand has weakened globally, it is important to note the difference between a complete economic capitulation versus a slowdown in global growth.
Using the IMF’s global GDP forecast as baseline (3.5%), we find that 2019 oil demand would still grow y/y (albeit by just 0.2 mb/d) even if GDP growth fell to 1.5%, which would entail a recession for the bulk of OECD and sub-par GDP growth for the most emerging economies. In its May economic outlook, the OECD’s “full-blown trade war” scenario—extending 25% bilateral tariffs to all products—only reduces global GDP to 2.7%, which still yields 0.7 mb/d of y/y demand growth.
As long as demand is not contracting y/y, and despite rising US production, the supply shortfalls are still greater, especially with Iran struggling to sell its oil (May exports at 0.1 mb/d). So, either fears of a sharp contraction in demand will translate into reality and timespreads will collapse into contango, or these fears will prove overblown and demand growth will only slow, in which case, flat price will have to rise to reflect the state of supplies and rising geopolitical tensions.
Clarity may only emerge after the upcoming G20, US Fed, and OPEC meetings, but in many ways the market has already reached a crossroads. The market is not keen to pay up for the possibility of tighter future balances, with the back end of WTI anchored at $50. But barring a recession, and if geopolitical risks continue to ratchet higher, prices have to catch up with timespreads. Indeed, we could see further attacks on tankers, potentially even expanding into the Red Sea. US Central Command is reviewing options for retaliation to create effective deterrence for the Iranians.
|Global oil demand growth scenarios, mb/d||US crude stocks, mb|
|Source: Energy Aspects||Source: EIA, Energy Aspects|