Oil prices have steadied since their turbulent end to 2018. As the global energy market gathers in London for the IP Week conference, the latest piece in our commodities outlook series examines the OPEC and non-OPEC supply-demand balance and its impact on 2019 oil price expectations.
- Oil prices steadied in January, helped by the impact of some key OPEC countries cutting supplies by more than anticipated in the month.
- The supply-demand balance is still expected to widen in the coming months, due to continued supply gains by countries outside OPEC.
- The latest piece in our commodities outlook series comes in the week that energy industry leaders gather in London for the annual IP Week conference.
Oil prices recovered slightly in January 2019, following steep declines during Q4 2018.
There were signs that some key OPEC countries cut supplies more than anticipated, thus improving the supply-demand outlook. The front-month ICE Brent crude futures contract averaged US$60.24/barrel (bbl) last month, which reflects a monthly increase of $2.57/bbl.
Medium gravity crudes, in particular, rallied over the last few weeks following the latest U.S. sanctions on Venezuela.
As Venezuelan crude, which ranges on the heavy side, faces challenges to reach buyers, Middle Eastern streams, which typically consist of medium crudes, have received significant support and have narrowed differentials to light sweet benchmarks.
Meanwhile, ongoing output cuts from OPEC and other producers continue to weigh on the supply outlook of medium and heavy crudes, shouldering gains in price levels.
Global oil demand growth
Global oil demand ticked up to an estimated 98.75 million barrels per day (bpd) in January, 70,000 bpd higher from one month ago. OECD demand is estimated to have declined by 360,000 bpd in January as U.S. refinery runs slowed by 500,000 bpd week-on-week, to average at 16.6 million bpd, based on weekly EIA data.
The decline was partly offset as European and Japanese inflows of crude oil were seen higher for last month. Appetite for crude oil is expected to continue declining by more than one million bpd between February and March this year as refinery operations peak.
Outside the OECD, crude intake rose by 430,000 bpd month-on-month to average at an estimated 51.9 million bpd. Imports of crude in Asia soared to 26.4 million bpd in January, from 25.9 million bpd in December.
Chinese crude imports broke through a new record high at 10.44 million bpd in January. Demand outside the OECD is expected to remain in uptrend this month, before declining in March. We maintain a view that although demand will grow outside the OECD this year the pace will be slower than it was previously as macroeconomic headwinds limit appetite.
OPEC and non-OPEC supply
Based on Refinitiv Oil Research forecasts, total OPEC crude oil output declined by 0.9 million bpd in January, mainly due to the OPEC+ deal and Qatar’s withdrawal from the group.
Although there is no major incident in Venezuela’s upstream sector to create an additional disruption in supply, Venezuela is still the weakest link in the group’s total output. Iran is likely to face additional supply disruptions from April onwards after import waivers from U.S. sanctions expire.
Total OPEC supply is estimated to have averaged 31.47 million bpd in January, as Saudi Arabia recorded the steepest decline in output.
Russia officially announced its commitment to the OPEC+ agreement to cut oil production from January 1, 2019. In spite of the cut in Russian output, non-OPEC total supply is still strong, mainly due to the recovery in U.S. output.
Total non-OPEC supply in January is estimated at 57.94 million bpd including U.S. non-crude output. The output is expected to have remained strong in February 2019.
OECD commercial oil inventories rose by 7 mmbbl month-on-month in November 2018, while preliminary data for December indicates stocks increasing by a further 8 mmbbl. The stocks fell below the five-year average in April 2018, but were expected to end 2018 more than 70 mmbbl above the average.
Similar to October, rising crude stocks exceeded a drop in refined product inventories. Nevertheless, the forward demand cover in November was estimated at around 59.2 days, which is 1.4 days below the five-year average.
2019 oil price expectations
Oil price expectations remain unchanged from previous estimates, anticipating only a mild recovery through the year as macro-economic issues are likely to persist, alongside continued uncertainties around the supply picture.
Attention has drifted away from actual oil market fundamentals in recent weeks and has been pinned primarily on potential drivers.
As the supply-demand balance is largely expected to widen in the next few months due to continued supply gains outside of OPEC and refinery turnarounds on the northern hemisphere, oil prices will likely remain under pressure in the near-term and would struggle to break above the recent range, unless a significant supply disruption occurs.
This piece is part of Refinitiv’s 2019 commodities outlook series.
Tumbling oil prices in 2018 resulted in a drop in the oil-parity price, which typically acts as a ceiling for the Asian spot price in the global LNG market.
Read the previous blog in this series to discover how the oil price decline fed through to the Asian spot price, including our forecasts for the LNG market in 2019.
Interested in what’s next in the 2019 commodities outlook series? Follow @RefinitivEnergy for timely updates as we get ready to release the 2019 European natural gas outlook.