November 16, 2018
WTI and Brent crude prices have dropped by more than $20 per barrel since the recent highs on October 3, 2018, and Tuesday’s collapse in WTI of more than $4 per barrel was the largest one-day drop since July 6, 2015. A string of bearish news has, in our view, prompted the market to moderate its previous perception about constrained US production growth and the immediate loss of Iranian production. Our well-by-well sensitivity analysis shows that US oil production may grow 1 million bpd y/y in 2019 even at current futures strip pricing. Nevertheless, we see upside to prices from here ($66 Brent, $56 WTI), but downside risk to our 2019 base case of $81 for Brent and $73 for WTI, as the market could build stocks to the tune of 1 million bpd next year if risks to Iran and other unplanned disruptions fail to emerge.
According to our Oil Market Balances Report for October 2018, the “OPEC+” countries increased production by around 1.2 million bpd between May 2018 – when the US sanctions on Iran were announced – and October 2018. We do foresee some upwards revisions to our October 2018 figures, suggesting that the increase may be as much as 1.4-1.5 million bpd. At the same time, US oil production has increased by 1.0 million bpd over the same period (May-October) according to our estimates.
The supply-demand outlook for 2019, therefore, is more or less unchanged compared to the balances shown in the October 2018 report, largely driven by US liquids supply growth of nearly 1.6 million bpd. Furthermore, our 2019 balances suggest that if we 1) do not experience deeper losses in Iran than in our conservative base case or 2) do not experience unplanned supply disruptions (for example in Libya and Nigeria), the market may potentially build inventories to the tune of 1 million bpd in 2019. The magnitude of these risks puts OPEC in a difficult position ahead of its policy decision in December, but our balances also support the case for why OPEC is preparing the market for the option to cut production.
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