Brent: Scenarios For 2019

Fitch Solutions / Oil & Gas / Global / Fri 01 Feb, 2019

oil tanker
fs disclaimer

Oil prices have struggled to increase gains from the opening weeks of 2019, posting a daily average of USD60.0/bbl in the YTD. Compared to this, our annual average forecast of USD75.0/bbl is strongly bullish, implying a monthly average of around USD77.0/bbl for the remainder of the year. While the balance of risk to this forecast lies squarely to the downside, we have opted to hold the forecast this month. Multiple known events are set for later in the year, which we believe provide significant upside risk to prices. Several outcomes are possible for each event and so this month we present our views in a scenario format. The narrative around our bullish view is presented as our base-case scenario.

Fitch Solutions And Bloomberg Consensus Brent And WTI Forecasts, USD/Bbl
  Spot YTD 2019f 2020f 2021f 2022f 2023f
Brent, Fitch Solutions 60.8 60.0 75.0 82.0 84.0 85.0 85.0
Brent, Bloomberg Consensus  66.9 70.0 69.6 68.6 65.0
WTI, Fitch Solutions


51.4 69.0 76.0 78.0 80.0 80.0
WTI, Bloomberg Consensus 60.5 63.0 64.8 64.5 62.1
*Fitch Solutions is a contributor to the Bloomberg Consensus. Data accurate as of February 1 2019. e/f = estimate/forecast. Source: Bloomberg, Fitch Solutions

Base-Case Scenario: Demand Growth Decelerates, But OPEC Tightens The Market 

Our core scenario reflects a fundamentally bullish outlook on the oil market for 2019. The supply-side is tightening, with our data indicating net growth in oil supply of 0.9% y-o-y, down from 2.2% in 2018. This assumes a high net level of compliance with the OPEC+ production cut deal in H119, with a return of barrels in the second half of the year. Saudi Arabia is shouldering the bulk of the cut and, as of February, will have removed around 1.0mn b/d of supply from the market. As with the previous round of cuts, this will offset softer compliance elsewhere in the group. 

Saudi Shouldering The Burden

Saudi Arabia Monthly Change In Crude Production*, '000b/d

*relative to production in October 2016, the reference level for the initial round of cuts. January & February numbers based on Saudi government estimates. Source: Bloomberg

Adding to this are the impacts of US sanctions on Venezuela and Iran, which will substantially curtail exports across the year, tightening the physical market. A more hawkish approach by Washington could further move the needle on the prices. However, with fiscal stimulus waning and trade tensions lingering, it is unlikely that the government will risk piling added pressures onto the US consumer. Incumbent President Trump will seek re-election in 2020 and gasoline prices are a key voting issue in the states. 

Many of the barrels lost from OPEC and Russia will be made up by US shale and we forecast 1.4mn b/d of annual average additions in crude, condensates and NGLs for 2019. Our core view is that shale production growth will remain strong over the coming five years, but that the pace of growth will slow. This reflects the limits to efficiency gains and productivity improvements, reduced options for asset high-grading, higher services costs and a shift in focus by key producers, from growth to margins. The concentration of output growth in the US is unprecedented in recent decades. According to our forecasts, the US will contribute around 50.0% of gross production growth in 2019 and over the five years to 2023. This creates structural vulnerabilities in the market, should shale production disappoint.

US Dominance Rising

Share In Global Gross Oil Production Growth By Largest Producer, %

Source: Fitch Solutions

On the demand side we forecast continued growth, albeit at a reduced rate. The global economy is slowing, with our economists forecasting a deceleration in real GDP growth from 3.4% in 2018, to 3.0% in 2019. In the main, this is being dragged down by developed markets (DMs), where tighter monetary conditions, ongoing trade tensions, waning fiscal stimulus in the US and heightened political tensions in the EU are clouding the outlook. This will dampen the global demand for oil and we forecast a marginal slowdown in growth, from 1.4% in 2018, to 1.3%, with emerging markets (EMs) carrying the load.  

DMs Starting To Drag

Global Oil Demand Growth Forecast, % chg. y-o-y

f = Fitch Solutions forecast. Source: Fitch Solutions

DM demand has been abnormally strong in recent years, lifted by lower oil prices and stronger economic activity in the US and, to a lesser extent, the eurozone. This trend is not sustainable and over the coming years, softening GDP growth, tighter environmental regulations, improved fuel efficiency and a switch away from oil will see demand growth decelerate and ultimately decline. The trend has already reversed in Europe, but US demand remains robust heading into the year. 

US, Europe Divergent

Oil Demand Growth, % chg. y-o-y, 6mma

Source: JODI

The EM outlook is brighter and we forecast the differential between EM and DM demand growth – which became heavily compressed from 2014 – to widen again in 2019. Commodity exporters, which were badly hit as oil and other commodities slumped, are staging a recovery, as economies slowly mend, fiscal strains begin to ease and confidence grows.

Pressures Ease On Major Exporters

Major Commodity Exporters Oil Demand Growth, % chg. y-o-y

f = Fitch Solutions forecast. Source: Fitch Solutions

In volume terms, China and India will remain the dominant drivers of global demand growth. Chinese oil demand has come under significant pressure in recent years. The economy has slowed, at first the result of deleveraging efforts by the government and more recently compounded by the fallout from its trade disputes with the US. In addition, Beijing is pushing to reduce the role of oil in China’s overall energy mix. Additional stimulus measures, though, should help stabilise growth in 2019 and Q418 data point to a generally healthier demand picture.    

Over the next five years, India will displace China as the global engine for growth. The fundamentals of the Indian market are supportive, with an expanding economy, high infrastructure spending, a growing population, rising incomes and deeper vehicle penetration all boosting demand. Some red flags have arisen around domestic credit growth and the health of the banking sector, but our economists maintain a constructive outlook on the market, forecasting real GDP growth of 7.1% for 2019. The fiscal and policy environment will likely remain supportive of demand, with elections upcoming this year, which we expect incumbent Narendra Modi will win.

China Losing Its Crown

Share In Global Gross Oil Demand Growth, %

f = Fitch Solutions forecast. Source: Fitch Solutions

EM demand in general remains healthy, weathering the run up in prices over 2018 - the impact of which was, in many markets, compounded by fuel subsidy reforms enacted since the oil price collapse. That said, significant vulnerabilities remain, given the repeated bouts of financial market volatility and lingering risks from a strong dollar, quantitative tightening and global trade tensions. The pause in the US Federal Reserve’s rate-hiking cycle and a more gradual normalisation of its balance sheet has offered some temporary respite, but our economists maintain that the balance of risks to global growth are skewed to the downside.

EM Demand Robust


Source: JODI

Key Risks To Base-Case Scenario
Upside Downside
US declines to extend sanctions waivers in May, driving Iranian exports down towards zero  OPEC production cut deal unravels
Unplanned outages rise in Nigeria, ahead of 2019 presidential elections Global economy spirals into recession, dragging down on oil prices and demand 
Libyan instability rises, renewed attacks on infrastructure lead to deeper and more sustained cuts to output  US-China trade dispute escalates, undercutting economic activity in both markets
Hard debt default in Venezuela triggers widespread disruption to exports  No-deal Brexit sharply undercuts UK economy and drags on EU, driving demand growth more deeply into decline 
Iraq protests spread, disrupting oil production and exports India experiences credit crunch, dragging GDP growth and demand for oil sharply lower 
Volatile oil prices and inflated services cost significantly lower spending and production growth in US shale  .
US-China resolve trade dispute, increasing economic activity in both markets .
Stronger-than-anticipated economic growth and an extended pause in the US Federal Reserve's rate-hiking cycle bolster sentiment and calm financial market volatility, increasing the appetite for risk assets  .
Refining sector falls far short of capacity needed to meet IMO 2020 sulphur regulations, crude run rates spike  .
Source: Fitch Solutions

Low-Case Scenario: Global Growth Slumps, EMs Take A Hit 

Under our low-case scenario, these risks come firmly into play. The main risk stems from a ratcheting up of global trade tensions, in particular between the US and China. Retaliatory tariffs have already begun to weigh on growth in these two markets and, while there have been some signs of progress in ongoing negotiations, large and fundamental barriers stand in the way of any substantive agreement between the two. Tensions sporadically flare and there remains significant risk of a re-escalation in the stand-off, which would further damage market sentiment and, with that, the prospects for oil. A sharper-than-expected deceleration in economic activity in either market would reverberate along their supply chains, dragging heavily on global real GDP growth. Emerging markets in general are heavily exposed to negative market sentiment and weakened external conditions and a hit to growth in these markets would be bearish for oil.

Global Economic Activity And Trade Momentum

Global Exporter Index (3mma) And GS Global Activity Indicator

Source: Bloomberg

On the supply side, with the global projects pipeline thinning, it is OPEC, Russia and the US that have capacity to tip the balance. In the US, shale growth has been damped by a squeeze on the services sector and pipeline bottlenecking in the Permian basin. Pipeline constraints are set to ease over 2019 which should flatter regional price spreads and open up exports. As such, there is the scope for production growth to accelerate more quickly than the market is allowing for. Bullish expectations will be hard to surpass, but record growth rates in the context of already-bearish sentiment could catalyse a further downturn in the price.

Upside Risks Remain

US Oil Production Forecast


There is a large volume of barrels currently being held out of the market by OPEC+, under their production cut agreement. Patchy compliance between individual participants and fatigue with a deal that has been in place for over two years could fray cohesion. If prices relapse once again and there is belief that the cut is no longer effective in supporting prices, it is possible that producers target higher output in pursuit of revenue. The downside risks to prices in this scenario, though, are extreme.

High-Case Scenario: Trade Tensions Recede, GDP Growth Accelerates 

As with the low-case scenario, it is largely demand, rather than supply, that could shock prices to the upside. The major area of uncertainty surrounds the impact from the implementation of the International Maritime Organisation’s new sulphur cap, which becomes effective January 1 2020. This limits the content of sulphur in marine fuels to 0.5% mass-by-mass, which compares to a limit of 3.5% currently, outside of Emission Control Areas. Due to various issues relating to the specification, quality and compatibility of low-sulphur fuel oils (LSFO), the bulk of existing demand for high-sulphur fuel oil (HSFO) will likely swing to marine gas oil over H219 and into 2020. Given low scrubber penetration in the global shipping fleet, the impact of this regulation on prices will largely hinge on the preparedness of the refining sector to meet. This is difficult to gauge, but a low level of preparedness would likely shock diesel prices and crude demand, as refineries maximised run rates, scrambling to adjust. 

Distillate Demand To Spike

Marine Fuel Demand Forecast, '000b/d

e/f = Fitch Solutions estimate/forecast. Source: Fitch Solutions

The scale of the price impact will also depend on the state of the diesel market, which in turn rests on the state of the global economy. In our high-case scenario we see substantial progress on trade talks between the US and China and the lifting of tariff measures. This would buoy market sentiment and fuel a reacceleration in US, Chinese and global GDP growth, lifting prices through both physical and speculative channels.

On the supply side, a combination of factors could lend itself to higher prices. One would be a decision by OPEC+ to roll over their production cut deal into H219, in the face of a tighter market and strength in Brent. A rapid return of cut barrels to market was one of the key contributing factors to the relapse in oil prices at the end of 2018 and the group may wish to avoid repeating past mistakes. Production in a number of OPEC markets – notably Libya and Nigeria – has been volatile in recent years, adding upside risk to Brent. Much of the volatility in Libyan production has been baked into prices at this stage, so a major supply shock would be needed to move the dial (Libyan shutdowns currently exceed 300,000b/d, with no tangible impact on Brent). Nigerian production, though, has been more stable in recent quarters and potential instability in Niger Delta region in the run-up to, or aftermath of, the February general elections could surprise the market.

Volatile Producers Pose Risk To Supply

Libya & Nigeria Output, '000 b/d, chg. m-o-m

Source: Bloomberg

There is also scope for upside from US sanctions on Venezuela and Iran, given that the US’ approach to-date has been relatively soft. If the US were to adopt secondary sanctions on Venezuela and/or to actively pursue its stated policy of zero exports from Iran, this could remove up to another 2.0mn b/d from the market, leading to a large global deficit for which there is insufficient spare capacity to fill. The caveat here is that Washington is unlikely to pursue these polices, unless the market is sufficiently loose, and prices sufficiently low, to mute the impact on US consumers.




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