GLOBALCRUDE OILOUTLOOK 2019

Demand to slow in 2019 still underpinned by China and India

Lower prices and downstream expansion will be supportive

US production still a wildcard with large volumes of US oil to hit the market

Tightening monetary conditions and a stronger US dollar may hurt supply and demand

Early effects of IMO 2020 to potentially strain the refining complex

Middle East risk steady with Saudi Arabia likely to support further cuts

The ICIS Outlook

Copyright 2019 Reed Business Information Ltd ICIS is a member of RBI and is part of RELX Group plc ICIS accepts no liability for commercial decisions based on this content

BY JULIEN MATHONNIERE JANUARY 2019

GLOBAL CRUDE OIL OUTLOOK 2019WILL CRUDE OIL DEMAND SUBSIDE IN 2019 A BRIEF RISK OVERVIEW

Global oil demand is projected to have grown by about 150m bblday in 2018 a slower level than in 2017 but still a healthy one Beyond the core air marine and road transportation fuels the call on oil as a petrochemical feedstock has been a powerful growth engine

In the US the expansion of chemical capacity has supported demand for liquid hydrocarbons (crude oil and natural gas liquids) as in Japan where the petrochemical industry is expected to remain one of the main sources of demand in 2019 Likewise South Korearsquos petrochemical and industrial sectors have captured the bulk of oil demand growth in 2018 and are forecast to keep the same trajectory in 2019

On the non-OECD side China has propped up global crude demand through a thriving petrochemical industry and a developing middle class that supports steady car sales and higher gasoline consumption Several large downstream expansion projects are set to provide some demand upside too

The country also retains a crucial role as a major foreign investor notably in the Middle East region where the future path of energy commodity prices will be key The 400000 bblday YASREF joint venture between Saudi Aramco and Sinopec is an example of that funnelling of Chinese funds into global downstream projects

Likewise in India domestic consumption and the rise of a large middle class fuel crude oil demand The country notably owns the worldrsquos largest refinery in Jamnagar Gujarat a 124m bblday plant partly quenching the fuel thirst of its east coast metropolis Mumbai and nearby Pakistan

CHINArsquoS RESPONSE TO US STANCEChina has been caught in a trade spat with the US and both countries were still trying to iron out their different on trade tariffs in early 2019 China remains highly dependent on resource imports priced in US dollars Therefore the

Global crude oil demand may slow in 2019 on tighter liquidity and a slightly higher risk of economic down cycle However lower prices and downstream expansion in particular in the petrochemical sector will be supportive The US remains a wildcard with no intent to be tied in a production agreement Price and supply wise its Middle East ally Saudi Arabia still stands at loggerheads The level of geopolitical risk will remain steady including the US hard stance against China and Iran and volatile politics in the wider Arab Gulf region

country has a strong incentive to ldquode-dollariserdquo commodity prices and promote a greater use of the renminbi its national currency

The purpose of the recently launched crude oil future contract on the Shanghai Futures Exchange (INE) was a first step in that direction allowing Chinese buyers to lock in oil prices and pay in their domestic currency

In theory it might be a threat to the US dollarrsquos well-established role as the worldrsquos main petro-currency even if the Chinese yuan is still a long way from dethroning the US dollar Beyond a renminbi-denominated oil (or precious metal) future contract the renminbi will also need to be a credible alternative with a track record as a strong currency (strong cash returns)

Regardless the INE crude oil futures have picked up market share from Brent and WTI throughout 2018 For investors willing to assume foreign exchange risk China is a thriving very liquid market However there is a risk of losing control of the exchange rate when swapping Chinese yuans for US dollars One possible short-term improvement could be to link Chinarsquos oil futures to gold as an alternative for international payments

Source OECDIEA

OilTransport

Other industry

Power

Petrochemicals

Other

Buildings

14

5

5

56

8

12

PRIMARY OIL DEMAND BY SECTOR IN 2017

Copyright 2019 Reed Business Information Ltd ICIS is a member of RBI and is part of RELX Group plc ICIS accepts no liability for commercial decisions based on this content

However China exhibits a weakening credit growth despite six months of cautious policy support

Unless the country decides to implement stronger fiscal stimulus its GDP is expected to weaken until the second quarter of 2019 with growth forecast at around 61 down from 65 in 2018 And Chinarsquos demand remain critical to the global markets including for crude oil

A HIGHER RISK OF DOWNTURNThe Fedrsquos five-year break-even rate which represents investorsrsquo view on the annual inflation rate until 2023 is now standing at around 150 indicating that markets are not overtly concerned about the inflation risk

Yet there is a higher risk of economic downturn in 2019 and a stronger probability that the US economy may converge with other developed nations economies

Global economic growth is forecast to weaken from about 37 in 2018 to 35 in 2019 The wider analystsrsquo consensus clearly points to downside risk but without any indicators suggesting a real risk of recession in 2019

India will remain the fastest-growing economy at about 72 followed by China at an expected 61 In comparison the US will hover around 26 and the Eurozone at 17

As a result a number of money managers have encouraged their clients to stock up on lower-risk more liquid assets to defend against rising volatility and widening credit spreads As they save cash for opportunities ahead some investors may be less willing to invest in replacement oil reserves and new long-drawn oil exploration and production projects Although this is unlikely to affect oil prices in the short-term it increases the possibility of a supply crunch in the mid to long-term

On the other hand it may also stave off the appetite for risky ventures beyond the well-surveyed area of the US oil patch Again this may help cap the potential upside of US crude output

TIGHTENING LIQUIDITYLower oil prices are likely to boost demand but OPECrsquos efforts will have little bearing on the global economy Global oil prices may be influenced by less visible developments among which a drain on US dollar liquidity

The current monetary tightening which materialised in a fourth policy rate increase by the US Federal Reserve and hence a stronger US dollar has put emerging economies under strain

Source Shanghai International Exchange (INE)

Month+1 Month+2 Month+3 Month+4 Month+5 Month+6

Number of open positions80000

70000

60000

50000

40000

30000

20000

10000

0

1111

9

1228

18

1214

18

1130

18

1116

18

112

18

1019

18

9281

8

9141

8

8311

8

8171

8

8318

7201

8

7618

6221

8

6818

5251

8

5111

8

4271

8

4131

8

3301

8

CHINA CRUDE OIL FUTURES OPEN INTEREST FOR THE SIX FRONT-MONTH CONTRACTS SINCE INTRODUCTION

Source US Federal Reserve Saint-Louis (FRED)

22

20

18

16

14

12

10

08

Jan-2

019

Jan-2

014

Apr-201

4

Jul-2

014

Oct-2

014

Jan-2

015

Apr-201

5

Jul-2

015

Oct-2

015

Jan-2

016

Apr-201

6

Jul-2

016

Oct-2

016

Jan-2

017

Apr-201

7

Jul-2

017

Oct-2

017

Jan-2

018

Apr-201

8

Jul-2

018

Oct-2

018

US FEDERAL RESERVE 5-YEAR BREAKEVEN INFLATION RATE

Source CME Group

88

89

90

91

92

93

94

95

96

97

98

Jan-2019

Dec-2018

Nov-2018

Oct-2018

Sep-2018

Aug-2018

Jul-2018

Jun-2018

May-2018

Apr-2018

Mar-2018

Feb-2018

Jan-2018

Dec-2017

Nov-2017

Oct-2017

Sep-2017

Aug-2017

US DOLLAR INDEX (DXY)

Copyright 2019 Reed Business Information Ltd ICIS is a member of RBI and is part of RELX Group plc ICIS accepts no liability for commercial decisions based on this content

Emerging market equities were down 25 between late January 2018 and late November 2018 with a low probability of rebounding in 2019 without more government spending from China (government spending) Global oil demand is forecast to grow by about 129m bblday in 2019 104m bblday of which will come from non-OECD countries according to OPEC

There is strong refined product growth from countries like India Indonesia Singapore and Thailand For the past few years those emerging economies have benefited from high liquidity and tight fiscal policies but the trend is inverting towards looser policies and tighter monetary supply

The run-up in US Treasury yields and appreciation of the dollar hence poses a significant stress test to the global financial system It also means that the cost of borrowing money will increase and that pending higher oil prices some oil fields may not be profitable at $50bbl especially in the US

Given the ample crude supply early into 2019 the oil market may balance at a lower marginal cost of production which means that higher-cost barrels will be priced out of the market

THE US WILDCARDSo far US shale drillers have benefited from cheap money and little oilfield service cost inflation But a tighter monetary market may put some of them under duress in 2019

Markets run on sentiments more than numbers and a rise in recession fears is a stronger risk in 2019 Although trade frictions have now partially been baked into commodity prices investorsrsquo reactions remain unpredictable

Beyond the risk of an unbalanced oil market US oil remains the wild card in 2019 being no party to any supply agreement

US shale drillers have proved more responsive to price swings than big oil but their aggregate response is extremely difficult to gauge since they do not coordinate their supply decisions

Likewise consumption responds to changes in price with a 6 to 18 month lag By the time demand destruction becomes visible it is too late and prices will have risen too much

With prices low enough the US Administration still has a good hand in the game President Donald Trump has backed off on his threats on Iran but he still has the ability to punish and can decide to go harder on the Islamic Republic within the next six months

US Federal Reserve Chairman Jerome Powell recently reasserted its independence after being criticised by the US President In other words even if a pause is US Fed policy rate hikes is probable in the first half of 2019 monetary tightening will persist as the Fed continues to re-purchase bonds and stocks to reduce its balance sheet holdings effectively removing cash from the US economy

THE PREMISES OF IMO 2020The first effects of International Maritime Organisation (IMO) 2020 new sulphur regulation may also start to be visible in 2019 or at least to begin to translate into a number of downstream production patterns

The new IMO 2020 regulation will come into force on 1 January 2020 setting the new global sulphur cap for marine fuels at 05 Sources EIA Russian Ministry of Energy JODI

US production Saudi production Russian production

in million barrels per day12M

11M

10M

9M

8M

7M

6M

5M

101184118

101174117

101164116

101154115

101144114

101134113

101124112

101114111

101104110

10194109

RUSSIAN OIL PRODUCTION VS SAUDI ARABIA AND THE US

Copyright 2019 Reed Business Information Ltd ICIS is a member of RBI and is part of RELX Group plc ICIS accepts no liability for commercial decisions based on this content

BY JULIEN MATHONNIERE JANUARY 2019

GLOBAL CRUDE OIL OUTLOOK 2019WILL CRUDE OIL DEMAND SUBSIDE IN 2019 A BRIEF RISK OVERVIEW

Global oil demand is projected to have grown by about 150m bblday in 2018 a slower level than in 2017 but still a healthy one Beyond the core air marine and road transportation fuels the call on oil as a petrochemical feedstock has been a powerful growth engine

In the US the expansion of chemical capacity has supported demand for liquid hydrocarbons (crude oil and natural gas liquids) as in Japan where the petrochemical industry is expected to remain one of the main sources of demand in 2019 Likewise South Korearsquos petrochemical and industrial sectors have captured the bulk of oil demand growth in 2018 and are forecast to keep the same trajectory in 2019

On the non-OECD side China has propped up global crude demand through a thriving petrochemical industry and a developing middle class that supports steady car sales and higher gasoline consumption Several large downstream expansion projects are set to provide some demand upside too

The country also retains a crucial role as a major foreign investor notably in the Middle East region where the future path of energy commodity prices will be key The 400000 bblday YASREF joint venture between Saudi Aramco and Sinopec is an example of that funnelling of Chinese funds into global downstream projects

Likewise in India domestic consumption and the rise of a large middle class fuel crude oil demand The country notably owns the worldrsquos largest refinery in Jamnagar Gujarat a 124m bblday plant partly quenching the fuel thirst of its east coast metropolis Mumbai and nearby Pakistan

CHINArsquoS RESPONSE TO US STANCEChina has been caught in a trade spat with the US and both countries were still trying to iron out their different on trade tariffs in early 2019 China remains highly dependent on resource imports priced in US dollars Therefore the

Global crude oil demand may slow in 2019 on tighter liquidity and a slightly higher risk of economic down cycle However lower prices and downstream expansion in particular in the petrochemical sector will be supportive The US remains a wildcard with no intent to be tied in a production agreement Price and supply wise its Middle East ally Saudi Arabia still stands at loggerheads The level of geopolitical risk will remain steady including the US hard stance against China and Iran and volatile politics in the wider Arab Gulf region

country has a strong incentive to ldquode-dollariserdquo commodity prices and promote a greater use of the renminbi its national currency

The purpose of the recently launched crude oil future contract on the Shanghai Futures Exchange (INE) was a first step in that direction allowing Chinese buyers to lock in oil prices and pay in their domestic currency

In theory it might be a threat to the US dollarrsquos well-established role as the worldrsquos main petro-currency even if the Chinese yuan is still a long way from dethroning the US dollar Beyond a renminbi-denominated oil (or precious metal) future contract the renminbi will also need to be a credible alternative with a track record as a strong currency (strong cash returns)

Regardless the INE crude oil futures have picked up market share from Brent and WTI throughout 2018 For investors willing to assume foreign exchange risk China is a thriving very liquid market However there is a risk of losing control of the exchange rate when swapping Chinese yuans for US dollars One possible short-term improvement could be to link Chinarsquos oil futures to gold as an alternative for international payments

Source OECDIEA

OilTransport

Other industry

Power

Petrochemicals

Other

Buildings

14

5

5

56

8

12

PRIMARY OIL DEMAND BY SECTOR IN 2017

Copyright 2019 Reed Business Information Ltd ICIS is a member of RBI and is part of RELX Group plc ICIS accepts no liability for commercial decisions based on this content

However China exhibits a weakening credit growth despite six months of cautious policy support

Unless the country decides to implement stronger fiscal stimulus its GDP is expected to weaken until the second quarter of 2019 with growth forecast at around 61 down from 65 in 2018 And Chinarsquos demand remain critical to the global markets including for crude oil

A HIGHER RISK OF DOWNTURNThe Fedrsquos five-year break-even rate which represents investorsrsquo view on the annual inflation rate until 2023 is now standing at around 150 indicating that markets are not overtly concerned about the inflation risk

Yet there is a higher risk of economic downturn in 2019 and a stronger probability that the US economy may converge with other developed nations economies

Global economic growth is forecast to weaken from about 37 in 2018 to 35 in 2019 The wider analystsrsquo consensus clearly points to downside risk but without any indicators suggesting a real risk of recession in 2019

India will remain the fastest-growing economy at about 72 followed by China at an expected 61 In comparison the US will hover around 26 and the Eurozone at 17

As a result a number of money managers have encouraged their clients to stock up on lower-risk more liquid assets to defend against rising volatility and widening credit spreads As they save cash for opportunities ahead some investors may be less willing to invest in replacement oil reserves and new long-drawn oil exploration and production projects Although this is unlikely to affect oil prices in the short-term it increases the possibility of a supply crunch in the mid to long-term

On the other hand it may also stave off the appetite for risky ventures beyond the well-surveyed area of the US oil patch Again this may help cap the potential upside of US crude output

TIGHTENING LIQUIDITYLower oil prices are likely to boost demand but OPECrsquos efforts will have little bearing on the global economy Global oil prices may be influenced by less visible developments among which a drain on US dollar liquidity

The current monetary tightening which materialised in a fourth policy rate increase by the US Federal Reserve and hence a stronger US dollar has put emerging economies under strain

Source Shanghai International Exchange (INE)

Month+1 Month+2 Month+3 Month+4 Month+5 Month+6

Number of open positions80000

70000

60000

50000

40000

30000

20000

10000

0

1111

9

1228

18

1214

18

1130

18

1116

18

112

18

1019

18

9281

8

9141

8

8311

8

8171

8

8318

7201

8

7618

6221

8

6818

5251

8

5111

8

4271

8

4131

8

3301

8

CHINA CRUDE OIL FUTURES OPEN INTEREST FOR THE SIX FRONT-MONTH CONTRACTS SINCE INTRODUCTION

Source US Federal Reserve Saint-Louis (FRED)

22

20

18

16

14

12

10

08

Jan-2

019

Jan-2

014

Apr-201

4

Jul-2

014

Oct-2

014

Jan-2

015

Apr-201

5

Jul-2

015

Oct-2

015

Jan-2

016

Apr-201

6

Jul-2

016

Oct-2

016

Jan-2

017

Apr-201

7

Jul-2

017

Oct-2

017

Jan-2

018

Apr-201

8

Jul-2

018

Oct-2

018

US FEDERAL RESERVE 5-YEAR BREAKEVEN INFLATION RATE

Source CME Group

88

89

90

91

92

93

94

95

96

97

98

Jan-2019

Dec-2018

Nov-2018

Oct-2018

Sep-2018

Aug-2018

Jul-2018

Jun-2018

May-2018

Apr-2018

Mar-2018

Feb-2018

Jan-2018

Dec-2017

Nov-2017

Oct-2017

Sep-2017

Aug-2017

US DOLLAR INDEX (DXY)

Copyright 2019 Reed Business Information Ltd ICIS is a member of RBI and is part of RELX Group plc ICIS accepts no liability for commercial decisions based on this content

Emerging market equities were down 25 between late January 2018 and late November 2018 with a low probability of rebounding in 2019 without more government spending from China (government spending) Global oil demand is forecast to grow by about 129m bblday in 2019 104m bblday of which will come from non-OECD countries according to OPEC

There is strong refined product growth from countries like India Indonesia Singapore and Thailand For the past few years those emerging economies have benefited from high liquidity and tight fiscal policies but the trend is inverting towards looser policies and tighter monetary supply

The run-up in US Treasury yields and appreciation of the dollar hence poses a significant stress test to the global financial system It also means that the cost of borrowing money will increase and that pending higher oil prices some oil fields may not be profitable at $50bbl especially in the US

Given the ample crude supply early into 2019 the oil market may balance at a lower marginal cost of production which means that higher-cost barrels will be priced out of the market

THE US WILDCARDSo far US shale drillers have benefited from cheap money and little oilfield service cost inflation But a tighter monetary market may put some of them under duress in 2019

Markets run on sentiments more than numbers and a rise in recession fears is a stronger risk in 2019 Although trade frictions have now partially been baked into commodity prices investorsrsquo reactions remain unpredictable

Beyond the risk of an unbalanced oil market US oil remains the wild card in 2019 being no party to any supply agreement

US shale drillers have proved more responsive to price swings than big oil but their aggregate response is extremely difficult to gauge since they do not coordinate their supply decisions

Likewise consumption responds to changes in price with a 6 to 18 month lag By the time demand destruction becomes visible it is too late and prices will have risen too much

With prices low enough the US Administration still has a good hand in the game President Donald Trump has backed off on his threats on Iran but he still has the ability to punish and can decide to go harder on the Islamic Republic within the next six months

US Federal Reserve Chairman Jerome Powell recently reasserted its independence after being criticised by the US President In other words even if a pause is US Fed policy rate hikes is probable in the first half of 2019 monetary tightening will persist as the Fed continues to re-purchase bonds and stocks to reduce its balance sheet holdings effectively removing cash from the US economy

THE PREMISES OF IMO 2020The first effects of International Maritime Organisation (IMO) 2020 new sulphur regulation may also start to be visible in 2019 or at least to begin to translate into a number of downstream production patterns

The new IMO 2020 regulation will come into force on 1 January 2020 setting the new global sulphur cap for marine fuels at 05 Sources EIA Russian Ministry of Energy JODI

US production Saudi production Russian production

in million barrels per day12M

11M

10M

9M

8M

7M

6M

5M

101184118

101174117

101164116

101154115

101144114

101134113

101124112

101114111

101104110

10194109

RUSSIAN OIL PRODUCTION VS SAUDI ARABIA AND THE US

Copyright 2019 Reed Business Information Ltd ICIS is a member of RBI and is part of RELX Group plc ICIS accepts no liability for commercial decisions based on this content

However China exhibits a weakening credit growth despite six months of cautious policy support

Unless the country decides to implement stronger fiscal stimulus its GDP is expected to weaken until the second quarter of 2019 with growth forecast at around 61 down from 65 in 2018 And Chinarsquos demand remain critical to the global markets including for crude oil

A HIGHER RISK OF DOWNTURNThe Fedrsquos five-year break-even rate which represents investorsrsquo view on the annual inflation rate until 2023 is now standing at around 150 indicating that markets are not overtly concerned about the inflation risk

Yet there is a higher risk of economic downturn in 2019 and a stronger probability that the US economy may converge with other developed nations economies

Global economic growth is forecast to weaken from about 37 in 2018 to 35 in 2019 The wider analystsrsquo consensus clearly points to downside risk but without any indicators suggesting a real risk of recession in 2019

India will remain the fastest-growing economy at about 72 followed by China at an expected 61 In comparison the US will hover around 26 and the Eurozone at 17

As a result a number of money managers have encouraged their clients to stock up on lower-risk more liquid assets to defend against rising volatility and widening credit spreads As they save cash for opportunities ahead some investors may be less willing to invest in replacement oil reserves and new long-drawn oil exploration and production projects Although this is unlikely to affect oil prices in the short-term it increases the possibility of a supply crunch in the mid to long-term

On the other hand it may also stave off the appetite for risky ventures beyond the well-surveyed area of the US oil patch Again this may help cap the potential upside of US crude output

TIGHTENING LIQUIDITYLower oil prices are likely to boost demand but OPECrsquos efforts will have little bearing on the global economy Global oil prices may be influenced by less visible developments among which a drain on US dollar liquidity

The current monetary tightening which materialised in a fourth policy rate increase by the US Federal Reserve and hence a stronger US dollar has put emerging economies under strain

Source Shanghai International Exchange (INE)

Month+1 Month+2 Month+3 Month+4 Month+5 Month+6

Number of open positions80000

70000

60000

50000

40000

30000

20000

10000

0

1111

9

1228

18

1214

18

1130

18

1116

18

112

18

1019

18

9281

8

9141

8

8311

8

8171

8

8318

7201

8

7618

6221

8

6818

5251

8

5111

8

4271

8

4131

8

3301

8

CHINA CRUDE OIL FUTURES OPEN INTEREST FOR THE SIX FRONT-MONTH CONTRACTS SINCE INTRODUCTION

Source US Federal Reserve Saint-Louis (FRED)

22

20

18

16

14

12

10

08

Jan-2

019

Jan-2

014

Apr-201

4

Jul-2

014

Oct-2

014

Jan-2

015

Apr-201

5

Jul-2

015

Oct-2

015

Jan-2

016

Apr-201

6

Jul-2

016

Oct-2

016

Jan-2

017

Apr-201

7

Jul-2

017

Oct-2

017

Jan-2

018

Apr-201

8

Jul-2

018

Oct-2

018

US FEDERAL RESERVE 5-YEAR BREAKEVEN INFLATION RATE

Source CME Group

88

89

90

91

92

93

94

95

96

97

98

Jan-2019

Dec-2018

Nov-2018

Oct-2018

Sep-2018

Aug-2018

Jul-2018

Jun-2018

May-2018

Apr-2018

Mar-2018

Feb-2018

Jan-2018

Dec-2017

Nov-2017

Oct-2017

Sep-2017

Aug-2017

US DOLLAR INDEX (DXY)

Copyright 2019 Reed Business Information Ltd ICIS is a member of RBI and is part of RELX Group plc ICIS accepts no liability for commercial decisions based on this content

Emerging market equities were down 25 between late January 2018 and late November 2018 with a low probability of rebounding in 2019 without more government spending from China (government spending) Global oil demand is forecast to grow by about 129m bblday in 2019 104m bblday of which will come from non-OECD countries according to OPEC

There is strong refined product growth from countries like India Indonesia Singapore and Thailand For the past few years those emerging economies have benefited from high liquidity and tight fiscal policies but the trend is inverting towards looser policies and tighter monetary supply

The run-up in US Treasury yields and appreciation of the dollar hence poses a significant stress test to the global financial system It also means that the cost of borrowing money will increase and that pending higher oil prices some oil fields may not be profitable at $50bbl especially in the US

Given the ample crude supply early into 2019 the oil market may balance at a lower marginal cost of production which means that higher-cost barrels will be priced out of the market

THE US WILDCARDSo far US shale drillers have benefited from cheap money and little oilfield service cost inflation But a tighter monetary market may put some of them under duress in 2019

Markets run on sentiments more than numbers and a rise in recession fears is a stronger risk in 2019 Although trade frictions have now partially been baked into commodity prices investorsrsquo reactions remain unpredictable

Beyond the risk of an unbalanced oil market US oil remains the wild card in 2019 being no party to any supply agreement

US shale drillers have proved more responsive to price swings than big oil but their aggregate response is extremely difficult to gauge since they do not coordinate their supply decisions

Likewise consumption responds to changes in price with a 6 to 18 month lag By the time demand destruction becomes visible it is too late and prices will have risen too much

With prices low enough the US Administration still has a good hand in the game President Donald Trump has backed off on his threats on Iran but he still has the ability to punish and can decide to go harder on the Islamic Republic within the next six months

US Federal Reserve Chairman Jerome Powell recently reasserted its independence after being criticised by the US President In other words even if a pause is US Fed policy rate hikes is probable in the first half of 2019 monetary tightening will persist as the Fed continues to re-purchase bonds and stocks to reduce its balance sheet holdings effectively removing cash from the US economy

THE PREMISES OF IMO 2020The first effects of International Maritime Organisation (IMO) 2020 new sulphur regulation may also start to be visible in 2019 or at least to begin to translate into a number of downstream production patterns

The new IMO 2020 regulation will come into force on 1 January 2020 setting the new global sulphur cap for marine fuels at 05 Sources EIA Russian Ministry of Energy JODI

US production Saudi production Russian production

in million barrels per day12M

11M

10M

9M

8M

7M

6M

5M

101184118

101174117

101164116

101154115

101144114

101134113

101124112

101114111

101104110

10194109

RUSSIAN OIL PRODUCTION VS SAUDI ARABIA AND THE US

Copyright 2019 Reed Business Information Ltd ICIS is a member of RBI and is part of RELX Group plc ICIS accepts no liability for commercial decisions based on this content

Emerging market equities were down 25 between late January 2018 and late November 2018 with a low probability of rebounding in 2019 without more government spending from China (government spending) Global oil demand is forecast to grow by about 129m bblday in 2019 104m bblday of which will come from non-OECD countries according to OPEC

There is strong refined product growth from countries like India Indonesia Singapore and Thailand For the past few years those emerging economies have benefited from high liquidity and tight fiscal policies but the trend is inverting towards looser policies and tighter monetary supply

The run-up in US Treasury yields and appreciation of the dollar hence poses a significant stress test to the global financial system It also means that the cost of borrowing money will increase and that pending higher oil prices some oil fields may not be profitable at $50bbl especially in the US

Given the ample crude supply early into 2019 the oil market may balance at a lower marginal cost of production which means that higher-cost barrels will be priced out of the market

THE US WILDCARDSo far US shale drillers have benefited from cheap money and little oilfield service cost inflation But a tighter monetary market may put some of them under duress in 2019

Markets run on sentiments more than numbers and a rise in recession fears is a stronger risk in 2019 Although trade frictions have now partially been baked into commodity prices investorsrsquo reactions remain unpredictable

Beyond the risk of an unbalanced oil market US oil remains the wild card in 2019 being no party to any supply agreement

US shale drillers have proved more responsive to price swings than big oil but their aggregate response is extremely difficult to gauge since they do not coordinate their supply decisions

Likewise consumption responds to changes in price with a 6 to 18 month lag By the time demand destruction becomes visible it is too late and prices will have risen too much

With prices low enough the US Administration still has a good hand in the game President Donald Trump has backed off on his threats on Iran but he still has the ability to punish and can decide to go harder on the Islamic Republic within the next six months

US Federal Reserve Chairman Jerome Powell recently reasserted its independence after being criticised by the US President In other words even if a pause is US Fed policy rate hikes is probable in the first half of 2019 monetary tightening will persist as the Fed continues to re-purchase bonds and stocks to reduce its balance sheet holdings effectively removing cash from the US economy

THE PREMISES OF IMO 2020The first effects of International Maritime Organisation (IMO) 2020 new sulphur regulation may also start to be visible in 2019 or at least to begin to translate into a number of downstream production patterns

The new IMO 2020 regulation will come into force on 1 January 2020 setting the new global sulphur cap for marine fuels at 05 Sources EIA Russian Ministry of Energy JODI

US production Saudi production Russian production

in million barrels per day12M

11M

10M

9M

8M

7M

6M

5M

101184118

101174117

101164116

101154115

101144114

101134113

101124112

101114111

101104110

10194109

RUSSIAN OIL PRODUCTION VS SAUDI ARABIA AND THE US

Copyright 2019 Reed Business Information Ltd ICIS is a member of RBI and is part of RELX Group plc ICIS accepts no liability for commercial decisions based on this content

The resulting margin effects will be more or less visible depending on refineriesrsquo complexity and flexibility Complex refineries could benefit from higher margins if the price of their crude intake drops

MIDDLE EAST RISKSIn the Middle East Washington has turned its back on Iran again leaving more leeway to Russian influence Meanwhile its Saudi ally is unlikely to lift the embargo against Qatar in 2019 also pushing Doha further into the destabilising arms of Turkey and Iran

Turkeyrsquos lira was among the worst currency performers in 2018 and the country still relies heavily on foreign influence As a result increased pressure on the countryrsquos central bank may unwind some of the tightening delivered in the second half of 2018 especially as the March 2019 elections loom

Saudi Arabia still produces some of the cheapest barrels in the world at less than $10bbl but according to the IMF the countryrsquos fiscal break-even price based on its current

Although compliance over the first year is estimated to be around 75 higher refinery runs of at least 400000 bblday will be needed to meet the required move to the new global bunker fuel standard

This is expected to strain the refining system as the production of cleaner and lower-sulphur products will have to replace that of higher-sulphur residual fuel

This may widen differentials between light clean and heavy dirty products even if the penetration of scrubbing technology is expected to progress at scale and partly offset demand for cleaner fuels - at least in the immediate aftermath of the new regulation

A strained refining market will in turn affect the crude oil market as well as product differentials There are expectations in the longer-run that low-sulphur crude may command a stronger premium while discounts for heavy sour grades could potentially widen significantly

Source ICE CME Group

Brent M1-M13Brent M1-M7

$8bbl

RED (or negative) indicates CONTANGO

BLUE (or positive) indicates BACKWARDATION$6bbl

$4bbl

$2bbl

$0bbl

-$2bbl

-$4bbl

-$6bbl

-$8bbl

-$10bbl

111

518

928

18

813

18

626

18

59

18

321

18

21

18

121

317

102

617

98

17

724

17

66

17

419

17

31

17

112

17

112

416

107

16

822

16

75

16

518

16

331

16

211

16

BRENT TERM STRUCTURE(CONTANGOBACKWARDATION)

Source IMF

$0

$20

$40

$60

$80

$100

$120

201920182017201620152014201320122011201020092008

in US dollars per barrel annualised

73

BREAKEVEN FISCAL OIL PRICE FOR SAUDI ARABIA

n Access daily price assessments on 57 key crude grades from the primary information provider to the ICE Brent futures

n Comprehensive crude oil coverage delivered in three daily updates including details on China crude supply and demand data and refinery markets

n Our global experts collate data from a wide range of market players and use a robust methodology to assess it

Find out more

A TRUSTED SOURCE FOR INDEPENDENT EXPERT VIEWS AND DATA ON THE GLOBAL CRUDE OIL MARKET

Copyright 2019 Reed Business Information Ltd ICIS is a member of RBI and is part of RELX Group plc ICIS accepts no liability for commercial decisions based on this content

government expenditure stands in excess of $70bbl This may pledge in favour of additional production cuts in 2019 as the country already hinted to

More worryingly maybe the postponed Saudi Aramcorsquos IPO has epitomised the kingdomrsquos unpredictable foreign policy and highly volatile domestic politics dealing investorsrsquo confidence a serious blow

A new generation of rulers in the Middle East has challenged the time-long model of tenured predictable leadership which is now becoming an exception rather than the rule

Higher prices tend to spur additional production volumes from OPEC but also from non-OPEC countries especially from the US But too high a clearing price could also dent global demand growth

With a higher chance of economic slowdown in 2019 a jolt in prices seems unlikely but on the other hand cheaper oil prices will help sustain demand into the first half of the year

The plan for oil producers is now to gradually return to a backwardated Brent market whereby prompt prices are higher than longer-dated future prices usually in response to tighter supply

Keep up with the latest energy news and insights