Global Crude: Change Coming in 2019 and OPEC+ Deal Looks Vulnerable

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.