You can access a recording of last week's global call on the outcome of the OPEC meeting in Vienna here on our website.
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Despite nominally positive news out of the G20 and the OPEC meeting, the market has been myopically focused on demand. Many see little reason to be bullish on trade, given that Trump’s policies are so prone to change, while OPEC’s nine-month extension was so heavily telegraphed that it would have taken an upside surprise (i.e. more cuts), to tighten the market and raise prices.
The current physical crude softness isn’t helping, though differentials have come off near-record levels and are hardly putrid. And with refining margins recovering, the downside to timespreads is limited, particularly for Brent ahead of IMO 2020. Asian refiners are taking more WAF and US lights rather than Middle Eastern sours, partly due to the rising risk and cost of sourcing the latter.
We now see Brent-Dubai averaging $4–5 across H2 19 and through Q1 20, although the gradual return of Chinese teapot buying will support East of Suez crudes too. We maintain that after one more cycle of weakness, the physical market should perk up, also supporting flat price. This is especially true given the price floor being provided by rising geopolitical tensions, with Iran’s provocative announcement that it was starting to enrich uranium to higher levels again.
Even the outcome of the OPEC meeting was more positive than the market gives it credit for. The 2010–14 five-year average is now the new baseline for OECD inventories, which means OPEC has nearly 250 mb of liquids and 160 mb of crude overhang still to run down and so will be keen to continue the deal through end-2020. And while the Urals contamination played a key role in Russia agreeing to extend the cuts, a struggling domestic economy has also meant that the country is likely to continue its cooperation with OPEC to provide stability to its income streams.
|Dubai cracking margins, $ per barrel||Russian manufacturing PMI, Index|
|Source: Refinitiv, Energy Aspects||Source: Bloomberg, Energy Aspects|