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Oil prices likely to be around $60-70/barrel during 2019, says APICORP
APICORP, the Dammam-based energy investment bank, is predicting oil prices in the range of $60-70/barrel in the second half of 2019, provided that there is no sharp downturn in global economic conditions.
APICORP’s prediction is contained in its first energy research paper of the new year. The three-page analysis provides an excellent overview of the factors that are currently affecting oil prices, and it demonstrates how complex and varied these factors have become, with OPEC being just one actor – albeit a very important one – in the global oil market.
The story, as told by APICORP, can be summarised as follows:
Between July 2016 and April 2018, OECD commercial oil stocks fell significantly, despite the rapid increase in US shale production and the recovery of Libyan and Nigerian oil output. Stocks fell because these supply gains were offset by higher than expected demand (from both OECD and non-OECD countries) and supply cuts agreed between OPEC and some other countries.
Going into 2018, OPEC and its allies seemed to have regained management of the oil market, APICORP says. The price of Brent crude oil rose from $33/b in January 2016 to $77/b in May 2018.
However, stability was disturbed by President Trump’s announcement in May 2018 that he would withdraw from the JCPOA and re-impose sanctions on Iran.
The expected loss of Iranian supply, along with a decline in other production, notably from Venezuela, and the anticipation of higher demand in the second half of 2018 led to further firming of oil prices, which traded above $75/b in late June/early July.
Despite a surge in output in May from key OPEC producers such as Kuwait, Saudi Arabia and the UAE, fears of a large loss in Iranian supply when US sanctions were re-imposed in November pushed Brent above $85/b in early October.
However, three factors combined to push oil prices lower in the final quarter of 2018: OPEC output increased by 1.3mn b/d to 33mn b/d despite lower supplies from Iran and Venezuela; Russia indicated that, due to improved budget outcomes, it was more interested in maintaining its supply than in maintaining prices; and, somewhat unexpectedly, the US gave market waivers to eight countries to enable them to continue importing Iranian oil.
By mid-November, Brent crude was trading around $60/b and it fell further in the following weeks.
OPEC’s December meeting tried to put the oil market back into balance by reducing its output by 1.2 mn b/d. The cut is due to last six months from January 2019, but there is a provision to extend it until the end of the year. Note that Iran, Venezuela and Libya are exempt from the cuts.
APICORP says that in 2019, much will depend on whether the production cuts that OPEC agreed in December will be sufficient to re-balance the market (that is, to prevent a significant increase or draw down in stocks). There will also be the question of OPEC member states’ compliance with their new quotas. Other issues will be the continuing increase in US production (which is expected to reach 12.1 mn b/d this year), and further increases in Russian production (which Russian sources expect to peak at around 11.45 m b/d by 2021).
In conclusion, APICORP thinks that the collective supply cut of 1.2 m b/d by IPEC and its allies; the high probability of supply losses from Iran, Venezuela, Libya and Canada; and global oil demand growth of 1.4 m b/d will result in a balanced market in 2019. This should leave to prices in the range of $60-70/b, barring a sharp slowdown in the global economy.
However, APICORP notes that price movements during 2018 showed that the market is driven not only by fundamentals but also by expectations and sentiment. As a result, in addition to addressing physical market imbalances, OPEC’s challenge will be to assert is credibility and consistently manage expectations and sentiment, APICORP says.
APICORP's full report can be seen here.
APICORP Energy Research is a monthly bulletin that is produced by the bank's Energy Reserach Department. Its senior economist is Mustafa Ansari.
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