“Lower oil demand growth in 2019” has grabbed headlines as IEA published a new, moderated growth outlook due to “increasing trade concerns, higher oil prices, and revisions to Chinese data”. However, while demand is a key component to global oil prices in 2019, the supply side of the equation is highly volatile at the moment as well, making the oil market challenging to predict. One of the largest wild cards on the supply side is the impact of US sanctions on Iranian crude production over the coming months. While BTU Analytics doesn’t have a crystal ball to predict exactly how the market will play out in 2019, we do have the data and models to help break this complex problem down into smaller, more digestible pieces to identify risks.
Starting with demand, the chart below shows the year-over-year changes in global liquids demand over the last 20 years. On average, global liquids demand grew by 1.1 MMb/d annually and in only two instances did we ever see global oil demand contract relative to prior years. However, the range of growth varies significantly and is correlated to the health of the global economy, as shown below with global GDP. For example, over the last three years, weak oil prices, paired with a strong global economy, resulted in average annual growth of 1.6 MMb/d in global liquids demand.
Now, as concern over the stability of the global economy increases, it seems unlikely that demand in 2019 can continue to grow at this pace, especially considering the strength in oil prices in 2018. While it’s difficult to predict if, when, and where the next recession will occur, we can look back on previous recessions to help quantify the impact of another downturn. During periods of regionally isolated downturns, as seen in the 1990s and early 2000s, global oil growth averaged only 415 Mb/d and 801 Mb/d, respectively. During the global recession in 2008-2009, demand actually contracted by an average of 844 Mb/d. These figures make the IEA’s most recent downward revision for 2019 global demand growth to 1.4 MMb/d seem minor, comparatively.
While a financial downturn is a possibility in the future, it is difficult to predict so let’s also examine some of the key supply-side variables that can also swing the equation, such as the impact of sanctions on Iranian production.
On May 8, 2018, the President issued a National Security Presidential memorandum to begin re-imposing sanctions on Iran that were relieved under the Joint Comprehensive Plan of Action put in place in July 2015 by the previous administration. The full implementation of these sanctions, which include limiting other nations’ ability to import and invest in Iranian crude, are expected to take effect in November 2018. While the full impact of the sanctions on Iranian liquids production is still highly speculative, we can look at historical sanctions to gain some ideas for a benchmark. The chart below highlights that Iranian liquids production declined by about 1 MMb/d within the first 12 months after the sanctions were imposed. As of July 2018 Iranian exports were 2.2 MMb/d and dropped to 1.6 MMb/d by September, compared to 300 Mb/d of overall production declines over the same time period.
Looking forward to 2019, BTU Analytics expects the US and Canada alone to add 1.7 MMb/d of liquids production in 2019 relative to July 2018 (prior to the impact of impending sanctions on Iranian production). On top of that, OPEC and Russia rebounding to pre-cut levels add an additional 500 Mb/d of supply to the market as highlighted in the green bars in the chart below. Incorporating production declines outside of Iran (highlighted in red) puts the global market 2 MMb/d longer compared to July 2018. Therefore, prior to Iranian production declines, including those seen to date, if demand growth is indeed 1.4 MMb/d in 2019 as predicted by the IEA, the global liquids market would be oversupplied by 0.6 MMb/d. This indicates that a 0.5 MMb/d production decline in Iranian crude from July 2018 levels could be absorbed by the market and that it would be balanced on a knife’s edge in 2019. However, if Iranian crude production declines by more than that, then the market would be short crude unless other OPEC members can grow production beyond historical peaks set in November 2016 before coordinated OPEC cuts were implemented. As of the latest September data, OPEC sans Iran has already grown production by over 550 Mb/d, which means it only has an incremental ~250 Mb/d of room to grow before reaching previous November 2016 peaks.
In any of these cases, prices are likely to remain volatile in 2019 and due to growing infrastructure constraints across the US oil network, the US is unlikely to be able to save the day, even if oil prices rise further. For more information on BTU Analytics’ outlook on oil production, infrastructure constraints, and price forecasts, request a free sample of our Oil Market Outlook.