Crude oil prices have fallen nearly 30 per cent the past two months. Dr Abhishek Deshpande, Executive Director-global commodity research, JPMorgan Chase Bank tells Rajesh Bhayani in an interview that the crude market is likely to enter a structurally slow demand phase in 2019-20. Sluggish GDP growth and low-cost non-Opec supply should put a cap on oil prices in the absence of any large-scale geopolitical disruption. Excerpts:
Why are crude oil prices falling and where do you see the bottom?
Navigating the oil market has become challenging due to US foreign policies concerning oil producers, including Opec, and rising geopolitical uncertainties. Supply was the main driver of oil prices in 2018 as we moved from an Opec-plus (Opec and other producers)-led tighter market in first half of 2018 to a US policy-led surplus in Second half. Russia, Saudi Arabia and US together added over two million bpd in the last six month, due to which supply has surpassed demand. As we look ahead, we expect oil demand growth to remain firm in the next couple of quarters, as our economists forecast an upswing in manufacturing PMI and industrial production. Equally, on the supply side, we expect a brief slowdown in North American supply growth in the next few months. This should help limited recovery in oil prices from the current level. However, this is conditional on Opec=plus reducing supply.
Will the recovery continue in the medium term?
This recovery is unlikely to last, as structurally demand should slow down in 2019-20 based on our economists' projections for GDP. Low-cost non-Opec supply growth should put a cap on oil prices in the absence of any large-scale geopolitical disruption. The latest breaks below preceding lows and crucial technical support in a very impulsive manner suggest that the maturing phase of the broader uptrend (2016-2018 rally) is complete. Apart from an intermediate bounce due next, which could extend if there is significant Opec intervention, we expect a much broader setback within 2019.
Can you give an estimate of crude oil levels, going ahead?
In 2019, we see a short but moderate recovery in oil prices from the current levels in H1 of 2019, based on Opec-plus reducing supply. However, oil prices will trend lower afterwards due to a slowdown in economic growth. Thanks to a 19 per cent correction in oil prices in Q4 of 2018, we revise our 2019 Brent price (average price) lower by $10/bbl to $73/bbl and initiate our 2020 Brent forecast at an average of $64/bbl. (In 2018 so far, the average Brent price has been $72.66). We remain risk bias negative, as a lot is dependent on Opec-plus actions at the December 6-7 annual conference in Vienna.
In what way do you feel Opec will respond when its members meet next month?
We believe Opec-plus will need to act decisively and rapidly with a combined supply cut of over 1.2 million bpd (barrels per day) on average for the whole of 2019 (and over 1.5 million bpd in Q1 of 2019) if they want to avoid a further drop in oil prices. We believe they are likely to discuss further extension of the existing accord at the next Annual Opec conference, given their commitment to, and high compliance with, the December 2016 accord and the continued rise in oil inventories lately.
How are changing global economic growth dynamics expected to impact crude oil demand?
The global macro outlook should remain benign both in 2019 and 2020 as the US economy cools due to fading policy stimulus and any pick-up in Chinese growth remains hinged to the outcome of US-China trade dialogue. At the same time, a rebound in manufacturing output in Q4 of 2018 from the record low data printed in Q3 of 2018 should support oil demand growth in the next two quarters. But apart from this short-term boost, we maintain our long held view on oil products demand growth softening in 2019 to 1.1 million bpd from 1.5 million bpd in 2018. The demand growth is expected to weaken again in 2020.
We forecast total global liquid supply to increase by 2.3 million bpd in 2018 and by 1.02 million bpd in 2019. Opec-plus will need to cut supply by over 1.2 million bpd on average for the whole of 2019 (and over 1.5 million bpd in Q1 of 2019) if they want to avoid a further drop in oil prices.
What will the demand scene in India be next year?
We revised the 2018 global oil product demand growth down by 160 million bpd to 1.47 million bpd due to weakness in non-OECD demand growth led by India, China and OECD Japan. Amid slower demand growth, we expect a near-term upside risk to our demand due to a pre-election demand surge in India in Q1 of 2019 and a possible de-escalation of the trade dispute between the US and China. Presidents Trump and Chinese premier Xi are expected to meet at the G20 summit in Argentina at the end of this month. A positive outcome from the meeting would be supportive of global economic growth and oil demand relative to our current central scenario.