From Global Risk Management
The Oil Market Annual Outlook Jan'19
From Global Risk Management
From peak to trough, Brent prices dropped by more than 40% in Q4-2018. Higher than expected supply as well as heavy equity markets weighed on oil prices. For the current year we expect volatility to continue, though averaging higher levels than seen at time of writing.
The U.S., China and Emerging Markets are all expected to continue to expand at a moderate pace, though a trade war, and rising interest rates are pulling in the other direction.
On the fundamentals side, world oil supply continues to increase, especially the three major oil producers U.S., Saudi Arabia and Russia produce at or near record levels; driving up crude oil supply by almost 3 mio. barrels per day during 2018. Starting this January, OPEC and some non-OPEC oil producers will implement a 1.2 mio. barrels per day production cut as per agreement from December 2018. Demand for oil has also increased – by 2.6 mio. barrels per day in 2018 with huge intra-year fluctuations. Expectations for demand growth this year are lower, but the current U.S. pipeline bottlenecks could be solved later this year, pushing more oil to the market.
U.S. sanctions on Iran and potential bans on countries importing Iranian oil took centre stage on the geopolitical front in 2018. Turned out that waivers were granted on the imports and other oil producers ramped up production to offset the missing Iranian oil barrels.
In our special feature article we look into the pipeline capacity in the U.S., the outlook for capacity expansion and potential impact on oil prices.
GOSI is the Global Oil Strength Index - an index created to evaluate important issues and the effect on oil prices. It answers the basic question: “Are oil prices going up or down from here?”
A high rating is bullish for oil prices and a low rating is bearish. In other words, the index is a lot of information boiled down to one number that indicates whether prices should go up or down.
|Oct. 18||Jan. 19||Comments|
|Fundamentals||55||55||World oil supply continues to increase, especially the three major oil producers U.S., Saudi Arabia and Russia produce at or near record levels.Expectations for demand growth this year are lower, but the current U.S. pipeline bottlenecks could be solved later this year, pushing more oil to the market. All in all, we set fundamentals to slightly bullish for oil prices this year.|
The financials in general look neutral for oil prices as the major economies, U.S., China, and Emerging Markets, all show continued economic growth. Dark horses to the growth figures are the trade war between the U.S. and China along with the increasing dollar’s pressure on Emerging Markets.
|Geopolitics||60||55||U.S. sanctions on Iran and potential bans on countries importing Iranian oil took centre stage on the geopolitical front in 2018. Turned out that waivers were granted on the imports and other oil producers ramped up production to offset the missing Iranian oil barrels. We set geopolitics to neutral for oil prices.|
|GOSI||54||55||GOSI is above the 50 level - indicating that our oil price expectation is bullish.|
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World supply has increased dramatically with the U.S. shale production taking centre stage. But also, Russia and Saudi Arabia set new records as the output cut from 2016 ended and the sanctions on Iran were accommodated.
During 2018 OPEC has played a key fundamental role in driving prices up to above $80 and then back down below $60 again as oil in October and November took a massive beating. The price had skyrocketed to the highest levels since before the 2014-crash, where oil prices were above $100 per barrel, and OPEC set in to correct this. The result was a massive increase in production from October and on, which in November was 1980 kbpd higher than the average for the rest of the year.
Part reason for this huge increase in production was the U.S. sanctions on importing Iranian oil taking effect from November 2018, as these were expected to decrease the country’s output. Indeed, they did, but not as much as initially expected as waivers were granted for importing the Iranian crude (for more about this see geopolitics). The average decrease in Iranian production is just shy of 500 kbpd meaning that some of the increase in OPEC production was offset, but not enough to prevent the prices from plummeting.
Fact Box: OPEC+ is a term describing the regular 14 OPEC member countries and the non-OPEC members which are working with OPEC to achieve common goal. The largest non-OPEC member is Russia.
In the start of December 2018 OPEC+ met at the biannual meeting with an agenda of stabilising the rapidly decreasing oil prices. The outcome was an agreed cut of 1200 kbpd starting from January 2019 and to be revised in April 2019. The meeting concluded that the 1200 kbpd cut was to be based on October levels, which was lower than November levels. About 800 kbpd of the cut is from actual OPEC members and the rest is from OPEC-allies with Russia taking the lead.
Fact Box: Below graph depicts (from left to right the first bar: October OPEC+ production increase from the 2018 average, second bar: The increase less the Iranian decrease in production. Third and last bar: The increase less Iranian decrease and with the 1200 kbpd production cut).
The graph show that with the production cut and current output level from Iran the OPEC+ production is going to be just 100 kbpd short of the 2018 average. The production cut is likely going to establish some floor underneath the price, all things being equal.
The 3 major oil producers and their role
During 2018 the balance of being the world’s leading crude oil producer has been disturbed and times are changing.
During the last half of 2018 Russia has become an important part of the OPEC cooperation as the country was rapid to increase production earlier in the year and seemed to have a key role in December’s decision to arrange a new production cut. Russia is the second-largest crude oil producer and is important for the OPEC cut as a lot of the OPEC effort could be offset by high Russian production.
Saudi Arabia proved to be able to set new records of crude oil production this year surpassing 11 mbpd in the November. Saudi Arabia is still the world’s largest crude exporter but is likely to be competing with the U.S. in being the world’s no. 1 crude exporter in the years to come.
|Fact Box: In 2018 the average exports from these 3 majors were: Saudi Arabia 7 mbpd, Russia 4.3 mbpd, and the U.S. 1.9 mbpd.|
Once again, the U.S. is taking centre stage as it has become the world’s largest producer of crude oil and has for the first time ever exported more oil than it imported (aggregating crude oil and products, this happened only in a single week). The U.S., however, has been and is still struggling with getting the produced crude on both the national market but even more so the international market. 2019 is, however, expected to be the year to start remedy part of the problem as plans of new pipeline capacity and export terminals are being developed and some of it is expected to come online during 2019 (for more about this see the special feature article).
All together these 3 majors have driven crude oil supply up by almost 3 mbpd during 2018 and U.S. exports have on average increased as well.
Even with the fresh OPEC production cut starting from January 2019 the year is entered with a massive global supply of crude oil, and possibly even more on the way from the U.S.
During 2018 global demand has fluctuated quite a bit as it initially was at 98.16 mbpd from where it accelerated throughout the year to top at 101,1 mbpd and decreased slightly towards the end at 100.8 mbpd – still a 2.6 mbpd increase during the year. We are entering 2019 with more bearish expectations in terms of financials but with demand growth expectations still being relatively high as the IEA expects demand to grow by 1,4 mbpd in 2019.
Non-OECD countries are regarded as the primary driver of world growth hence as well world crude oil demand as can be observed from below graph.
Fact Box: Below graph show the total world crude oil consumption which is the bars referring to the right axis. Furthermore, the total OECD and non-OECD crude consumption is depicted referring to the left axis. The key takeaway is that lately the world oil consumption has primarily been driven by non-OECD countries.
With the oil consumption being heavily exposed to the growth in Emerging Markets these are key to understand which direction world crude oil demand is headed. Especially China and India are important players and will as well be in 2019.
In 2018 the market was worried about Emerging Markets lowering crude demand for two reasons – the U.S.-China trade war and the combined effect of high oil prices and weak currencies. Both of these have the potential to affect growth, most likely with a time lag, but so far the net effect has not been a decrease. This is depicted on below graphs showing the crude oil import of China and India, which is regarded as a proxy for their crude oil demand.
Even though world crude oil demand growth expectations are not increasingly bullish, both China and India are on average importing increasingly more crude. This growth is however subject to financial strength which seems more bearish entering 2019 (for more about Emerging Markets financials see the financials section).
|Fact Box: During 2018 fuel prices rose remarkably at the same time as a lot of Emerging Markets currencies decreased in value making the fuel more expensive in terms of domestic currency as oil is priced in USD. This was a bearish indication as it possibly would decrease Emerging Markets crude oil demand but with a modest increase in strength of the Emerging Markets currencies and huge decrease in oil prices, this is not regarded as an important factor during 2019, unless the scenario is to reverse.|
Crude demand growth expectation is at 1.4 mbpd according to the IEA in 2019, which is modest compared to the actual increase of 2.6 mbpd in 2018, but however still an increase. Combined with the OPEC+ cut this could put upwards pressure on the price during 2019 fundamentally speaking as the net OPEC+ effect concludes in a global production of about the same level as the average of 2018 Q1-Q3. The U.S. however has a lot of oil, and a lot of this oil has not been able to reach the market in 2018. Massive investment plans are therefore under development and some of the projects are expected done during 2019. Such could raise the U.S. crude export capacity from the 2018 record of 3.2 mbpd. This year’s expansions are mostly expected online in the second half of 2019 but could possibly become subject to delays as U.S. oil prices have plummeted.
The world crude production capacity remains ample; but with the current OPEC+ supply cut and a continuation of bottlenecks in the U.S. pipelines and exports, the fundamental effect on crude oil prices is slightly bullish during the first part of 2019. The potential of a lot more pipeline capacity towards the end of the year is likely to have a bearish effect on the oil price.
"We set crude fundamentals to slightly bullish"
2018 was a rollercoaster with extremely volatile oil prices, trade wars, U.S. sanctions, and most recently the enormous decline in stock markets. How are the financial figures affected and how could this affect the demand for oil in the year to come?
After Q2’s massive GDP growth rate of 4.2% Q-o-Q (highest since 2014), a high, but slightly more modest rate of 3.4% for Q3 was reported. These rates have been driven partly by an increasingly healthy economy, and partly by an expansionary policy agenda. A $1.5 trillion tax cut package was implemented on January 1st, 2018, to encourage consumer spending and bolster business investment. Retail sales Y-o-Y have been in an increasing trend through the first part of 2018 before reaching its peak of the year, 6.62%, in July. From this point a decline started to evolve with the latest release showing 4.2% from November, which is below the average of 4.40 from 1993 to 2018. As retail sales are an indication of economic activity, this declining trend is a bearish indication. Please note that this is a Y-o-Y growth rate, meaning that a positive number still means growth, just at a slower pace.
Another important indicator of economic activity is the U.S. PMI, which has been fluctuating between 57.3 and 61.3 during 2018 without any clear-cut direction. Numbers in this interval are considered healthy and bullish for oil prices with the latest release being 59.3 from November. This is an indication of belief in further growth. Here, new orders, production and employment rose faster which all reflect continued expanding business. This is bullish on oil as increased production and growth call for higher oil demand.
|Fact Box: The PMI (Purchasing Managers’ Index) is an indicator of economic health for manufacturing and service sectors. The purpose of the PMI is to provide information about current business conditions and is based on five major survey areas: new orders, inventory levels, production, supplier deliveries and employment. A PMI above 50 represents an expansion when compared with the previous month. A PMI reading under 50 represents a contraction, and a reading at 50 indicates no change.|
Since 2016 the Fed (U.S. central bank) has intended to raise rates and has carried these increases out frequently since late 2017. Latest increase to 2.5% happened on 19 December 2018 with intensions of two additional increases in 2019.
Raising rates is a sign of a healthy economy which is also supported by the declining unemployment rate. The unemployment rate is now steady around 3.7 % which is the lowest rate since 1969.
Despite this positive tendency, the increasing interest rate may have some negative impact as it increases the cost of debt - both U.S. federal debt as well as company debt. Higher cost of debt will tend to have a slowing effect on investment. Is the economy ready for this?
|Fact Box: Increasing interest rates serves two main purposes, controlling inflation and ‘reloading’ to prepare if another recession should occur. The effect from lowering interest rates is that it encourages consumers to consume and companies to invest.
In case of a recession the Fed needs interest rates to be above a certain threshold to have effect. Historically, interest rate decreases of between 3-5% have been sufficient to help the economy back on track from a recession.
As both GDP and PMI reflect positive economic sentiment, they are bullish indicators on oil prices. This is in opposition to increasing interest rates that could weigh on prices.
These numbers are mostly historical and thereby state what the economy has achieved. In the following we will take a look at the dollar and the stock market which both are more indicative of future evolvement rather than historical.
The dollar index was slowly moving upwards through 2018. This strengthening of the dollar could be due to its interaction with the rising interest rate. A higher U.S interest rate makes holding dollars more attractive. However, a more expensive dollar is an issue – in addition to the tariff war - for U.S. exporters as this makes U.S. goods more expensive relative to similar goods from other countries. It also makes imports relatively cheaper for the U.S. importers. Besides U.S. exporters, increasing interest rates can hurt Emerging Markets: It becomes more expensive to service dollar-nominated debt and it may hurt capital inflow (which Emerging Markets are highly dependent on) as interest rates in the U.S. increases. Exports have taken a hit while imports prosper. This weighs on GDP, as mentioned above.
While U.S economic figures from 2018 look healthy, stock markets - which are considered indications of the future (6-12 months) as all available information is incorporated into the prices -are looking very bearish. Asian indices have been declining since start February 2018 and American indices started declining end September 2018. Due to the (traditional?) correlation between oil market and stock markets this was very bearish on oil.
Summarising 2018 in economics figures, the U.S. economy seems to be doing well. However, the latest decline in stock markets does look like there is something brewing that should be considered with caution.
We assess U.S. Financials to Neutral.
The Chinese economy is under pressure, internally as well as externally. The Q3 GDP growth figures released in October’18 showed 6.5% Y-o-Y growth rate after a 6.7% Y-o-Y in the previous period, Q218. The rate was lower than expected as the market consensus was around 6.6% and instead it showed the lowest growth rate since the first quarter of 2009.
Despite lower numbers, it is important not only to focus on China’s GDP growth rates, as one might miss the bigger picture altogether. In 2010, 10% real GDP growth added $606 billion to the economy. In 2017, however, 6% growth added $1,202 billion, double the amount of the 10% growth in 2010.
That said, the Chinese GDP per capita is only ranked 108 in the world with $16,700 per capita, compared to the European Union ranked 45 with $40,900 per capita and the U.S. ranked 19 with $59,500 per capita.
As China is the largest oil importer in the world, a slowing growth is indeed bearish on oil prices, as growth goes hand-in-hand with oil demand.
Looking at the Chinese trade balance we see an increase from 34.02 B USD to 44.75 B USD from October to November. Further, an increase is seen comparing the trade balance of November 2018 to November 2017 where the trade balance was 38.43 B USD.
This number is positive to the Chinese economy, but Chinese officials acknowledged that Chinese exporters have been rushing out shipments to beat upcoming U.S. tariffs, buoying the growth readings, while some companies such as steel mills are diversifying and selling more products to other countries.
Retails sales Y-o-Y have been declining in China since the financial crisis in 2008 with latest release being 8.1%, the lowest retail sales growth rate since 2003.
The PMI numbers from China do not date back very far, but have from 2011 to the end of 2017 averaged close to 51, and have been declining since June 2018, to currently 50 and, hence, neutral. Not a dramatic fall but, combined with retail sales, these are considered bearish indictors.
Is this a slowing economy or an economy suffering under U.S. tariffs? This is difficult to asses, but looking at the graphs below that date back to 1998 we see an overall decrease on all parameters long before tariffs were in the picture. As long as the growth numbers do not turn negative, the same amount of oil is likely to be imported. However, with growing production capacity in Saudi Arabia, Russia, and the U.S., sustained growth is needed in China if the supply of oil should meet demand.
Combining these numbers and the knowledge from the stock market, we set the Chinese Financials to be bearish on oil.
|Fact Box: Emerging Markets consist of: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, South Korea, Taiwan, Thailand, and Turkey.|
As Emerging Markets have seen their currencies tumble against the dollar while oil prices have increased through 2018, this has spelled trouble for these developing countries. Almost all these countries are oil importers, and currencies and oil prices have been the number one Emerging Markets topic of 2018. As oil is nominated in dollars, depreciating currencies against the dollar adds an additional expense on top of the oil price.
Since October, though, oil prices have slumped from a high of $86 to around $58 at time of writing. While a drop in oil prices and a slight strengthening in Emerging Markets currencies since end October are positive in respect to the import of oil and thereby the productivity, other financial numbers are still at play.
China, India, Thailand, Turkey, South Africa and Indonesia top the list of biggest Emerging Market oil importers, Thailand enjoys a solid current account surplus and China only edged into a rare deficit in the first half of the year. However, Turkey, Argentina, India and Indonesia find themselves high up on the list of countries featuring large current account deficits as a percentage of their GDP, according to the International Monetary Fund (IMF).
Financials of China and Emerging Markets are not as correlated to oil prices as U.S. financials. However, as these economies are very large as a whole, their importance should not be neglected and especially not when looking some years ahead.
Financials’ effect on oil prices is set to Neutral/Slightly bearish for Emerging Markets as the impact of lower oil prices is likely to offset the expectations of lower economic growth and the struggling currencies.
The economic figures are ambiguous, as they appear healthy in the U.S., where we experience a very bearish sentiment in the stock market. Looking at China and Emerging Markets, more questionable figures appear. The correlation between oil prices and the stock market is apparent, even though not bulletproof. If we see a turnaround in stocks with U.S. financial figures staying on current levels, this would be a very bullish indication on oil prices, from a financial point of view. However, if the growth figures, entering the first months of 2019, show signs of weakness we will expect to see continuous low prices on oil.
"We set financials to neutral"
On the geopolitical scene, 2018 brought several factors likely affecting the oil price. Especially the U.S. has influenced the global political and financial scene and brought volatility along. In the Middle East; oil production disruptions seemed less serious compared to 2017, but other incidents drew attention.
The trade war between the U.S. and China has been spurring uncertainty in almost all markets from the start of 2018 as tariffs could be applied on all sorts of goods. The trade war drew a lot of attention from the media, but so far deep financial determinants don’t look very bearishly affected on either side.
The current status is that there has been 2 phases of tariffs meaning that the U.S. has imposed a total of $250 billion on Chinese imports and China has imposed tariffs worth of $110 billion on U.S. imports. Overall the U.S. are able to tax a larger value of imported goods (because the U.S. imports more) than the Chinese meaning that the U.S.’ “arsenal” is larger than that of China, however both countries are able to raise the size of each tariff as much as they like.
Lately the two countries held a meeting which concluded in a 90-day truce starting from 1 January 2019. This means that U.S. threats of adding another 25% tax on $200 billion worth of Chinese imports are on hold. Allegedly there is, though, still some uncertainty whether the truce will hold, and the two parties will reach a final deal. With regards to the oil market, the trade war is less likely to be of great importance during 2019, unless it manifests heavily on global growth.
Iran sanctions and OPEC production cut
The U.S. sanctions on Iranian oil exports and sanctions if a country was to import Iranian crude was expected to have an immense effect on the oil market as some analysts expected global supply to decease as much as 1.5 mbpd all else equal. This assessment wasn’t unrealistic as the same sanctions previously resulted in approximately 1 mbpd export decrease. However just as the sanctions were to take effect the U.S. granted waivers to the largest importers of Iranian oil allegedly concluding in the opposite effect – namely further oil price decrease.
The waivers that were granted would last 180 days i.e. until start May 2019 and sums to a total of 850 kbpd. This is about a month after the next official OPEC meeting where the newly agreed production cut will be revised. As OPEC has proven more than able to offset the missing Iranian barrels it is likely that should the U.S. decide not to grant any further waivers, OPEC+ would be able to compensate the missing supply.
|Fact Box: Waivers granted: China 360 kbpd, India 300 kbpd, South Korea 130 kbpd, Turkey 60 kbpd – according to Reuters.|
U.S. president Trump had promised to lower fuel prices and at the same time to tighten up the Iranian nuclear deal eventually crippling them economically if they were not to comply. As Iran didn’t comply Trump was caught in a dilemma having promised cheaper fuel but at the same time limiting the oil output from one of the largest OPEC producers. These two obviously didn’t go hand in hand and leading up to the midterm elections Trump chose low fuel prices over tightening the grip on Iran’s economy and hence nuclear development – concluding in waivers for importing Iranian crude oil.
Situation in the ME
During 2018 the conflict between Saudi Arabia and Iran escalated with Iran threatening to close the strait of Hormuz. Saudi Arabia drew attention from the global media as the Kashoggi case was condemned by the U.S. and other western countries spurring volatility in the financial markets. However none of these events did more than shock the market temporarily.
Crude production-wise the situation in the Middle East however seems improved.
During 2018 the crude supply from Libya has been averaging higher levels since 2017 and way higher levels than 2016. As of November 2018 Libya, is producing 1.2 mbpd which is still 0.5 mbpd shy of their record level. Though the situation in terms of production has improved it is still a fragile increase as long as the country’s political forces are still splintered which was observed when a major disruption entered during December 2018.
In Nigeria the picture is much like that of Libya – production is on average increasing, however not as much as in Libya percentage wise. During the previous OPEC production cut Nigeria was exempted but is now a part of the deal indicating that the situation is improving with regards to crude production – Nigeria’s output quota is 1.685 mbpd starting from January 1st, 2019.
During 2018 Iraqi officials stated several times that the country intends to increase both crude production and exports. Especially via the Southern terminals but as well in the Kirkuk field and exports through the Ceyhan port. In November 2018 the Iraqi oil minister Thamar Ghadhban said that upgrading capacity is top priority – especially in the South.
Plans of increasing crude production is more likely to succeed as unrest in the country has been decreasing and the Iraqi government has gained more control of the country. However, the whole region is still fragile allegedly even more with the U.S. deciding to pull out of the neighbouring Syria. Should president Trump decide to pull U.S. troops out of Iraq the plans of increasing capacity could further be jeopardized.
The two major events affecting the oil market in the second half of 2018, namely the trade war and Iranian sanctions have so far proved not to manifest in the market other than temporarily. The effects have now wearied off and it seems like the trade war is not going to affect global growth immediately. Further OPEC has proved able to offset the missing barrels from Iran due to sanctions. Therefore, these two are not considered decisive for the direction of the oil market in 2019.
The general situation in the Middle East seems improving and a careful assessment is that this would continue in 2019, but with sporadic incidents still shocking the market on a short-term basis.
Other factors that are worth keeping an eye out for this year is Brexit. There have been a lot of speculation about how it would affect the global financial markets, but so far it has allegedly had no effect on the oil market.
The geopolitical scene in 2019 is assessed to have a neutral effect on the crude oil market.
"We set geopolitics to neutral"
Oil price forecast (average)
Please note that the forecast is the AVERAGE price per quarter. Thus, prices during the quarter will likely be both higher and lower.
Brent forecast and prices (USD per barrel)
How is the report structured?
The report is divided into three parts – each part elaborates on three main topics which are influencing the oil prices:
The GOSI is the background for the medium term forecast on oil prices. The last pages in the report are our forecast and company news.
If you have questions or comments regarding our Annual Oil Market Outlook, please email: firstname.lastname@example.org
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A lot is happening in the U.S. upstream business, and the U.S. is now among the world’s largest crude oil producers. Most of the crude comes from the Permian basin which is still developing at high pace because of the shale fracking technology. Currently the Permian basin is accounting for about 1/3 of the total U.S. production.
As production has expanded, much of the crude oil is stuck inside the region because of limited transportation infrastructure. This results in huge differentials during 2018 between the Permian in-land priced WTM and the Cushing in-land priced WTI to the Louisiana and Houston priced crudes LLS and MARS. This is not just an indication of oil being trapped in the Permian, but also that there is an increasing need for further export capacity from the U.S. ports. The MARS and LLS have direct access to the global markets as they are extracted from the gulf rather than in-land, which is part reason for them being priced closer to Brent.
These in-land pricing differentials have led to planning of huge investments in not only in-land pipeline capacity with the main purpose of making Permian crude available outside Texas - but to an even higher degree the export capacity as well. A lot of the investors acknowledge a need for the U.S. being able to load VLCCs as the economics of scale are far better than on the smaller Aframax and Panamax type carriers.
Fact Box: The loading capacity of the crude carriers measured in DWT (deadweight tonnage) is:
In spring 2019 construction of a 1 mbpd export capacity project is set to start - the South Texas Gateway Terminal. The hub is expected to be partially operational in the end of 2019 and fully in the summer of 2020.
Below graph shows the current and planned takeaway pipeline capacity from the Permian and the planned export capacity. Note, that the current export capacity is not fully utilised as the record crude export level was 3.2 mbpd and the 2018 average was 1.9 mbpd. The reason for this is likely that the WTI grade has been at a price level which keeps refiners around the globe from buying the crude. This price is, however, expected to converge to the levels of the WTM grade as the Permian crude WTM becomes available to export. The lower WTI price would result in increased demand and thereby an increased need for export capacity. Therefore, Permian pipeline takeaway capacity is planned to reach 6.5 mbpd and an export capacity equal to the entire Russian production is set to be reached at the same time.
The key to understanding these price differences and how they affect the price of Brent really is that increased capacity for exporting the cheap WTM would drag down the price of WTI and thereby the spread to Brent would widen. Consequently, it would be profitable for refiners around the world to import U.S. grades instead of grades priced basis Brent – thereby making the Brent less attractive and hence ultimately cheaper.
|Fact Box: The Permian Basin just recently got its own contract on the Intercontinental Exchange (ICE) as an increasing amount of new pipeline capacity is expected to go directly to the gulf coast export terminals – thereby bypassing the current main pricing hub in Cushing, Oklahoma where the WTI is priced|
Fact Box: please be advised that the 500 kbpd increased export capacity in 19H2 is not official but a best-case guesstimate.
Decreasing crude oil prices in general could, however, jeopardise these investments as there would be no gain in importing and exporting U.S. crude if differentials are not substantial. Especially if the price of crude decreases below the marginal costs of production, investments not yet financed would be jeopardised.
A concluding remark about the plans and projects is that despite some extra pipeline capacity might come online in the first half of 2019, it is possibly not going to affect the global crude prices significantly. However, if the planned capacity expansions of the last half of 2019 actually are going to stick to the planned timeline, we could see the Permian shale starting to affect the global crude prices significantly towards the end of 2019/start of 2020.
The key take-away is that the U.S. is trying to deal with the capacity problems and the solutions might not be that far away even though there is a degree of uncertainty tied to the timeline of these projects.
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