Crude Oil, Short-Term Energy Outlook 06-19

Onyx Power and Gas Consulting continues with its weekly series providing the Short-Term Energy Outlook as of June 11, 2019.  This series of news articles should provide a complete insight on the current conditions of the energy…enjoy, check out archives and come back each week for additional information on how all sorts of energy sources impact our daily lives.

Crude Oil

Prices: The front-month futures price for Brent crude oil settled at $61.67 per barrel (b) on June 6, 2019, a decrease of $10.51/b from May 1. The front-month futures price for West Texas Intermediate (WTI) crude oil for delivery at Cushing, Oklahoma, decreased by $11.01/b during the same period, settling at $52.59/b on June 6 (Figure 1).

Figure 1: Crude oil front-month futures prices

Crude oil price volatility increased in May after declining for four consecutive months and stayed at elevated levels into the first week of June. Demand-side concerns became the most salient issue during the past month and contributed to volatility and price declines for risk assets such as commodities and equities. Both China and the United States issued tariffs on each other, with the United States also announcing potential tariffs on Mexico near the end of May. In addition, expected industrial activity, as measured by the manufacturing Purchasing Managers’ Index (PMI), declined across several countries in May, and the U.S. manufacturing PMI fell to its lowest level since 2009. These developments are contributing to concerns that economic growth could be lower than market participants’ expectations, which would cause oil demand growth to also be lower than expected.

Declining crude oil production in Venezuela and Iran, as well as Saudi Arabian over-compliance with December 2018 Vienna agreement production cuts, pushed crude oil production among members of the Organization of the Petroleum Exporting Countries (OPEC) to 29.9 million barrels per day (b/d) in May, the lowest for any month since July 2014. In addition, production shut-ins in Russia related to contamination of the Druzhba crude oil pipeline have emerged, and the market effect of these reductions has been compounded by planned maintenance on crude oil production platforms in the North Sea, where crude oil grades are in many cases substitutable for the disrupted Russian barrels.

A weakening outlook for demand at the same time near-term oil supplies are disrupted has lowered spot prices of crude oil while increasing futures price backwardation (when near-term prices are higher than longer-dated ones). Despite the recent demand uncertainties, EIA still expects a need for inventory withdrawals to meet demand given its forecast of near-term global crude oil production. EIA forecasts that global oil inventory withdrawals in the second and third quarters of 2019 will average 0.2 million b/d and 0.6 million b/d, respectively. EIA estimates that, as of the end of May, crude oil and other petroleum inventories in the Organization for Economic Cooperation and Development (OECD) were enough to cover 61 days of demand, only 1% lower than the five-year (2014–18) average (Figure 2). EIA expects that inventory withdrawals in the coming months will reduce the days of coverage further.

Figure 2: Days of supply difference to five-year average and Brent 13-1 spread

EIA is reducing its 2019 Brent crude oil price forecast to $67/b, which is $3/b lower than in the May STEO. The lower 2019 price forecast largely reflects recent global crude oil price declines as well as the uncertainty about global oil demand growth. EIA expects global oil demand to grow by 1.2 million b/d in 2019, 0.2 million b/d lower than the May forecast. EIA’s forecast for 2019 non-OECD oil-weighted GDP growth, based on forecasts from Oxford Economics, is 2.7%, which would be the lowest growth since 2009 and the second-lowest growth on record in a data set going back to 1994. However, EIA expects that crude oil prices will increase from current levels by the end of the year. EIA forecasts that Brent prices will average $68/b in the fourth quarter of 2019 as a result of inventory withdrawals during the summer, lower OPEC crude oil production than previously forecasted, and the expected increase in demand for light sweet crude oil ahead of the implementation of low sulfur bunker fuel regulations in January 2020. EIA expects that prices will remain near that level in 2020 based on EIA’s forecast of relatively balanced global oil markets next year.

Crude oil price spreads: Notwithstanding the decline in overall price levels in May, several factors specific to Brent and WTI are widening the Brent–WTI futures price spread. The Brent–WTI futures price spread settled at $8.94/b on June 6, an increase of 45 cents/b since May 1 (Figure 3). In late April, flows on parts of the Druzhba pipeline, which supplies Russian Urals crude oil to Europe, were suspended because of contamination of the crude oil. This disruption limited availability of Urals for several refiners in Europe that are regular purchasers of the crude oil grade. By early June, some Druzhba pipeline flows had been restored, but other refineries were still waiting for the contaminated crude oil to be removed from the pipeline so that flows of uncontaminated crude oil could resume. The contaminated crude oil will have to be stored for several months and gradually blended with clean crude oil to dilute the contaminants so the oil can be refined. Certain North Sea crude oil streams can substitute for Urals, which likely contributed to some relative upward price pressure for Brent in May. In addition, planned maintenance at some North Sea fields is expected to reduce available deliveries for June, which may have also put upward price pressure on Brent prices relative to other crude oils.

In contrast, Cushing WTI prices declined more than Brent prices in May because of logistical problems in the U.S. Midwest. Floods in the Midwest contributed to the temporary closure of several pipelines out of Cushing that provide feedstock to certain refiners. This disruption likely contributed to crude oil stocks in Cushing building by 4.8 million barrels from the first week in May to the last week in May, a month in which Cushing stocks typically draw by 2.1 million barrels, based on the five-year average stock change. Outside of the logistical issues in Cushing, U.S. commercial crude oil inventories increased in May. Total U.S. crude oil inventories increased by 15.7 million barrels in May, according to STEO estimates for the month, compared with a five-year average draw of 2.1 million barrels. If confirmed in monthly data, this year’s stock build would be the largest for the month of May since 1991.

Figure 3: Brent-WTI futures price spread

Emerging market currencies: Some of the demand-side concerns affecting crude oil markets could also be reducing the value of emerging market currencies compared with the U.S. dollar. The Morgan Stanley Capital International (MSCI) Emerging Market Currency Index tracks a basket of emerging market currencies that declined 1% from May 1 through June 6 (Figure 4). A lower value of the index indicates emerging market currencies are depreciating against the U.S. dollar. The recent decline in the MSCI Emerging Market Currency index could indicate a reduction in economic activity in countries such as China or South Korea, countries with relatively high weightings in the index. The Chinese manufacturing PMI for May declined to 49.4. Any reading lower than 50 indicates a contraction in manufacturing activity. In addition, total South Korean exports of all goods declined 9.4% from May 2018 to May 2019, the sixth consecutive month of year-over-year declines.

Figure 4: Crude oil and Emerging Markets Currency Index

The professional consultants at Onyx Power & Gas Consulting are always ahead of the current issues that may affect energy consumption and pricing. Now is the time to partner with an Onyx professional consultant to discuss energy management and secure energy prices based on today’s stable pricing. Volatility in the energy markets makes it too precarious to take chances. Partner with Onyx Power & Gas in Making Energy Make a Difference!

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