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Oil prices continue to defy fundamentals, stuck between fears of an imminent US–Iran deal, weak demand, and claims that Saudi supplies are back to normal following September’s attacks. Given that US supplies are disappointing, the slow return of on-spec Saudi volumes and the very low probability of Iranian oil returning, oil prices and deferred spreads appear too low to us, unless we enter a deep and protracted recession. But we don’t see flat price perking up until late 2019.
This is not only because refineries will be returning from works by then, but also because the slowdown in US output growth that has led us to trim our 2020 forecasts will be more apparent. If the expected pick-up in US output as new Permian pipes started is lower than the market’s forecasts, it will become obvious that it is geology not infrastructure that is behind the slowdown.
Moreover, crude stocks are drawing counter-seasonally due to the Saudi outage (with the recent builds in Saudi Arabia comprised of unprocessed off-spec crude) and surging freight rates. Chinese commercial crude stocks fell by a record 35 mb m/m in September. Asian refiners are either drawing down storage or seeking short-haul barrels. So, the small correction in prompt Brent spreads and USGC grades and the rally in East of Suez crudes is justified. As China emerges from the Golden Week holiday, it is likely to return to buy crude again, supporting spreads.
Adjusting for the demand and supply downgrades, our 2019 balances are largely unchanged but 2020 has tightened. We now expect crude draws of 0.3 mb/d next year, compared to 0.1 mb/d previously, while total liquids builds have been reduced to 0.6 mb/d from 0.8 mb/d before. This again suggests that deferred spreads and the back-end of the Brent curve are undervalued.
|Fig 1: US crude production, mb/d||Fig 2: China commercial crude stocks, m/m, mb|
|Source: EIA, Energy Aspects||Source: Orbital Insight, Energy Aspects|