Path to Balanced Oil Market A Marathon, Not a Sprint

The journey to a balanced oil market will take time, and is more likely to be a marathon than a sprint, the International Energy Agency (IEA) writes in its January 2018 oil market report. The agency notes that while Saudi Arabia is determined to protect its price aspirations by delivering substantial production cuts, there is less clarity with regard to its Russian partner. Data show that Russia increased crude oil output in December to a new record near 11.5 MMbbld and it is unclear when it will cut and by how much. Other non-OPEC countries joining in the production cut deal also saw higher output, including Mexico.

Elsewhere, there are signs that market rebalancing will be gradual. The trajectory of Iran’s production and exports remains important. In December, total exports increased slightly to more than 1.3 MMbbld. With U.S. waivers allowing Iran’s major customers to buy higher volumes than was previously expected, more oil will remain on the market in the early part of this year. Venezuela saw the collapse of its oil industry slow during the second half of 2018, with production falling recently by about 10,000 bbld each month rather than by the 40,000 bbld seen earlier in the year.

“The level of output in the world’s biggest liquids producer, the U.S., will once again be a major factor in 2019,” IEA reports. “We saw incredible and unexpected growth in total liquids production of 2.1 MMbbld in 2018. For this year, we have left unchanged for now our forecast for growth of 1.3 MMbbld. While the other two giants voluntarily cut output, the U.S., already the biggest liquids supplier, will reinforce its leadership as the world’s number one crude producer. By the middle of the year,
U.S. crude output will probably be more than the capacity of either Saudi Arabia or Russia.”

For oil demand, IEA adds, there is a mixed picture. Falling prices in the fourth quarter last year helped consumers and there are signs trade tensions might be easing. In many developing countries, lower international oil prices coincide with a weaker dollar as the likelihood of higher U.S. interest rates fades for now. “However, the mood music in the global economy is not very cheerful. Confidence is weakening in several major economies. For now, we retain our view that demand growth in 2018 was 1.3 MMbbld, and this year it will be slightly higher at 1.4 MMbbld, mainly due to average prices being below year-ago levels.”

In the meantime, refiners face a challenging year, the agency observes. Processing capacity will increase by 2.6 MMbbld, the biggest growth in four decades, while margins are already pressured by low gasoline cracks due to oversupply and weak demand. The changes to the International Maritime Organization’s fuel regulations due in 2020 are another big issue for some refiners as they seek to find outlets for unwanted high-sulfur fueloil. By the end of this year, all industry players—upstream and down-stream—may feel as if they have run a marathon.

(SOURCE: The Weekly Propane Newsletter, February 19, 2019)