Plummeting production in Venezuela, declines in Angola, and lower exports from Iran will encourage Saudi Arabia and other OPEC members to increase crude output later this year, and remain in compliance until they decide to modify or end the OPEC+ deal.
The impact of perhaps a year and a quarter of OPEC+ production restraint has been impressive, and finally there is consensus that the oil market has returned to balance. Some believe that balance is precarious and vulnerable to decelerating demand and rising non-OPEC production in 2019. Others believe the balance is headed towards tightening in a way that will lift prices above $80. Add to that the possible end of the Iran nuclear deal and price expectations go even higher. Clearly with inventories way down, demand quite strong and the OPEC+ deal working with help from Venezuela’s production decline, it is quite easy to be bullish on 2018. We have revised our 2018 price forecast up, especially during the seasonally strong months of the year.
Does the market need more production restraint in 2019? There are two notable developments that will shape crude supply and demand. First, there is a tremendous volume of new distillation capacity coming online between now and the end of 2019. There is a little bit of splitter capacity in these volumes, but most of this increase in capacity is designed to run medium or heavy crude. Russian and Arab Gulf production, rather than U.S. shale, will meet this demand as it emerges. The second is the change in bunker specifications starting in 2020. Bunker suppliers will have to replace high sulfur product with lower sulfur product before January 2020. This will mean higher runs and sweeter crude input as a first response, lifting demand for U.S. shale in some locations, including the USGC and Europe.
Significant volumes of crude oil will chase quality-driven opportunities in 2019. Crude price differentials will be volatile and light sweet crude prices will find support despite weakening overall supply demand fundamentals in 2019.
All signs from the Jeddah meeting point to OPEC and its partners continuing their over-compliance with the crude production deal. OPEC has cut 2.08 million b/d from its baseline, nearly twice the original target. OPEC’s cuts will deepen in the coming months, with Venezuela’s collapsing output more than offsetting small increases in other members’ production.
Wall Street Journal–December 13, 2017
Officials urge international offering for Aramco, rather than selling a stake to Beijing, which they fear would boost its standing in Middle East
The deal with OPEC has lifted oil prices, liquidated a global oil glut, and paid dividends in the form of improved relations with Saudi Arabia, boosting Russia’s real and perceived influence in the Middle East.
Hydrocarbon Engineering–November 9, 2017
Russian refiners will increase production of transport fuels by 110 000 bpd next year, according to ESAI Energy’s recently published ‘CIS Watch One-Year Outlook.’
Oil & Gas Journal–October 25, 2017
ESAI Energy LLC forecasts leaner and smaller Canadian oil sands projects in the coming years as producers face high costs in a recovering oil-price environment.
Midland Reporter-Telegram August 28, 2017
“Strong growth from the U.S. and Canada will make OPEC’s task difficult,” Elisabeth Murphy, analyst with ESAI.
Ship & Bunker August 18, 2017
ESAI Energy Analyst, Chris Cote says the new IMO regulation “will turn the bunker fuel oil market on its head in 2020.”
World Oil August 16, 2017
ESAI Energy Analyst, Ian Page points out that “alternative vehicles will not have a major impact on global gasoline demand until after 2022.”
Oil & Gas Journal August 14, 2017
In its recent Five-Year Outlook, ESAI Energy points out that the call on Organization of Petroleum Exporting Countries crude will remain under tremendous pressure over the next 5 years.
Oil & Gas Journal July 19, 2017
“Although we see that the USGC surplus could rise to 2 million b/d next year, its disposition is unclear,” said Elisabeth Murphy, an ESAI Energy analyst. “Lower prices will adversely impact the rate of growth coming from shale production.”
Oil & Gas Journal June 21, 2017
Elisabeth Murphy of ESAI said, “Although the pace of growth is expected to slow next year, US shale production is forecast to be about 500,000 b/d higher in 2018 than 2017, still very impressive growth.”
This is more than a diplomatic row among GCC members. Perhaps emboldened by President Trump’s visit, Saudi Arabia and its allies have declared if you are with Iran (or specific radical Sunni groups), you are against us. This effort to delineate sides in the region cannot be easily reversed without substantial outside pressure. Expect a geopolitical premium to creep into energy prices as this dispute continues.
OPEC is very much alive, and has just extended its production restraint through the rest of 2017 and the
first quarter of 2018, improving the outlook for 2017 and maybe even 2018.