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Trade and economic headwinds are causing uncertainty for fuel markets
Since the 2014 price crash, global fuels consumption has grown at a rapid
pace, but trade disputes and a slowdown in economic growth could weigh on
2020 oil market fundamentals. Demand is not the only concern, as US shale
has continued to be the biggest single source of production growth year after
year as investment dried up in many regions, and OPEC has pushed to balance
Deloitte forecasts that US GDP growth will slow in 2020, with a 25 percent
chance of recession and only 10 percent chance that growth in 2020 will match
recent years. Globally, the picture is not too different as there are a number
of countries facing economic headwinds. Trade disputes have expanded to
include not just Asia, but also Europe, and high debts and weak currencies
in several countries do not bode well. Demand for refined products, and
therefore oil, tends to track the global economy—if the latter begins to slow,
the former will likely as well. Furthermore, regulatory changes like IMO2020
could lead to near-term changes in product demand, changing the types of
crude needed to meet the potential rapid increase in marine gasoil to meet
lower-sulfur fuel requirements. Refiners could find themselves pinched not by
not having enough IMO2020-compliant low-sulfur fuels but by having too much
However, unlike previous years where US shale production continued to grow
even as prices were low and volatile, we have seen a number of operators focus
on capital discipline in the face of poor market sentiment, investor skepticism,
and cash-flow constraints. If production from the Permian moderates in 2020,
and that is quite uncertain, it would make OPEC’s job easier. The mid-2019
OPEC and non-OPEC country (e.g., Russia) agreement cut targets by 1.2 million
barrels per day, but global oil and fuels stocks rose in 2018 and 2019. Lower
shale output along with OPEC’s quotas could bring the market in balance in
2020 and act as a cushion against weakening prices.
Increasing security and decreasing demand of global oil supply
The historically important issue of global oil supply security returned to the
forefront of industry attention in mid-September 2019, when an attack on
critical facilities in Saudi Arabia resulted in the largest single supply disruption
since the Gulf War of 1991. And yet, market disruption was largely avoided, with
prices rapidly reverting to their recent trading range after a one-day surge.
And, even though this event was dramatic, the global market has also seen
the slower-moving decline of supply from two other major producers—Iran
and Venezuela; the first largely because of economic sanctions, the second
mainly due to both sanctions and the ongoing degradation of investment and
operating conditions in the Venezuelan oil sector. So, should security of supply
be a bigger concern in 2020? There are a number of factors in play that could
reduce supply risk in the current market environment:
• Growing supply from Western Hemisphere producers—the United States
and Brazil are both delivering growth in supply barrels from onshore shale
plays and deepwater plays, respectively. Together, they added 1.4 million b/d
of liquids supply (including crude oil, condensates, and NGLs) in the first nine
months of 2019.1The Canadian oil sands can also deliver more barrels from
current projects if required by the market.
• Healthy commercial crude oil inventories in OECD countries, standing at 2.9
billion barrels in September 20192—seemingly enough to offset a lengthy
supply disruption if needed.
• The production restraint agreement between the OPEC and non-OPEC
Vienna agreement countries is still in place, preserving spare production
capacity—if needed, adjustment to add barrels back to the market in tight
supply conditions would very likely be accommodated.
If we also assume that a lower-demand growth outlook is quite possible in
2020, as a result of potentially weakening global economies, then we could
conclude that supply security is reasonably robust, even in the face of security
risks in some key producing countries.
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