The oil market is likely to tighten further in the second half of the year due to further supply restraints and relatively healthy demand, with IMO 2020 potentially pushing Brent crude toward $80/b by end-2019. S&P Global Platts Analytics believes the market is relatively tight in terms of the supply and demand balance and that it’s likely to be only a matter of time before that is reflected in global oil prices.
“The market is weak today because you have the macroeconomic environment but you also have the fact you have a record amount of refinery shutdowns in May and spilling over to June partly because of Asia refinery shutdowns but also 200,000 b/d of lost refinery throughput as a consequence of Druzhba,” the head of Platts Analytics’ Chris Midgley said at a briefing referring to the ongoing disruption of Russian crude exports via the key pipeline network to Europe.
However, the logic of Brent crude trading just above $60/b was thrown into question, with funds reluctant to get on to the long side of the market and he indicated there was strong support at that $60 level. “The fundamentals are supportive of [higher prices] but we have seen very little acknowledgement of fundamentals and a very wide traded range,” he added, noting on the demand side that for the global economy “the signals aren’t that bad.”
While worries around the global economy were getting more headlines, Midgley pointed to reasonably solid China and India demand. The US has been holding up well thanks to infrastructure spending, with the US Federal Reserve now more likely to cut interest rates that will also help support emerging economies. Platts Analytics sees global economic growth of around 3.3% in 2019 and oil demand growth of 1.36 million b/d, playing down macroeconomic fears and the impact of the trade disputes the US has been engaged in with Mexico and China.
Moreover, the refinery demand drop off for maintenance in May and June has masked the crude demand picture. “The second half has strong demand of 4-5 million b/d from refineries coming back from maintenance, then a spike in refinery runs at the end of the year partly related to IMO 2020,” said Midgley,