Energize Weekly, May 22, 2019
The oil market is being roiled by production cuts, political sanctions, slow economic growth and political uncertainty, leading to a market of “mixed signals,” according to the International Energy Agency (IEA).
The global market for another key petroleum product, liquefied natural gas (LNG), also looks to be out of balance and subject to geopolitical uncertainties, according to Bloomberg New Energy Finance (BNEF).
The IEA, in its April market report, cut its oil demand growth estimate for 2019 by 90,000 barrels a day (b/d) to 1.3 million b/d.
The reduction is based on data showing weaker than expected growth notably in Brazil, China, Japan, Korea and Nigeria, the IEA said. The agency expects a rebound in the second half of 2019.
The revision in the demand target, the agency said, led to an implied surplus of supply in the first quarter of 2019 of 700,000 b/d.
In its monthly market report, the Organization of the Petroleum Exporting Countries (OPEC) estimated global oil demand growth at 1.21 million b/d—compared to 1.41 million b/d in 2018.
The OPEC report said, “upside potential for global economic growth in 2019 remains limited.”
Yet even as demand slows, other market forces are buttressing prices with the chief being a major cut in production by OPEC.
In December, OPEC members agreed at a meeting in Vienna to cut production by 812,000 b/d. Russian and nine other non-OPEC countries pledged to reduce output by 383,000 b/d for the first six months of 2019.
In April, the Vienna-agreement countries collectively produced 440,000 b/d a day less than they promised with Saudi Arabia producing 500,000 b/d below its allocation.
The IEA said that overall global supply dropped by 300,000 b/d led by Iran, Azerbaijan, Kazakhstan and Canada.
In April, the U.S. announced it was rescinding waivers permitting eight nations, all key customers, from receiving Iranian oil leading to an April Iranian production cut of 164,000 b/d to a total production of 2.55 million b/d for the month, the OPEC report said.
Despite the Iranian sanctions and geopolitical concerns about Libya, Venezuela and a military buildup in the Persian Gulf, the market remained stable because of reserve production capacity, the IEA said.
“Despite the difficult geopolitical backdrop and other supply problems, headline oil prices are little changed from a month ago at just above $70 a barrel for Brent” crude, according to the agency.
The U.S. Energy Information Administration in its May Short-term Energy Outlook forecasts Brent spot prices will average $70 a barrel in 2019, a $5 a barrel increase from its April forecast number, but still below the average 2018 price of $71 a barrel.
A key reason for the projected price stability is the global reserve production capacity. “There have been clear and, in the IEA’s view, very welcome signals from other producers that they will step in to replace Iran’s barrels,” the agency said.
In the U.S., the IEA said, “strong permitting activity and a recovery in fracking activity in early 2019 should support higher output in the second half of the year.” Saudi Arabia also has idle production capacity.
The global LNG market has been growing and was up more than 10 percent in 2018, according to Bloomberg.
The export-import market, however, is out balance, according to BNEF. Between now and 2023, LNG exports are set to increase faster than import demand, putting “downward pressure on prices,” but after that import demand will increase faster than exports.
“We expect the market to become tight again from 2022 onwards, with demand rising due to higher penetration of gas in China’s inner provinces and growth of LNG bunkering in inland waterways, and as Thailand and Pakistan become important engines of LNG demand growth,” Maggie Kuang, head of LNG analysis at BNEF, said in a statement.
In the ongoing trade dispute between the U.S. and China, LNG has been targeted for a 25 percent tariff by China in response to U.S. tariffs. The tariff is set to go into effect June 1. There is already a 10 percent tariff on U.S. LNG imports.
“The U.S. and China have a natural supply-demand match when it comes to energy, but China’s increase of retaliatory tariffs to 25 percent poses a threat to U.S. investment in LNG by limiting our share in the world’s fastest growing LNG market,” Stephen Comstock, a director at the American Petroleum Institute, said in a statement. “These retaliatory tariffs dampen the prospects for the growing U.S. LNG investment, hurt U.S. workers, and benefit America’s foreign competitors.”
