Trade tensions, surplus drawdown can cause oil prices to plummet

Brent crude oil price could head south to US$50 per barrel level in 2019


Oil prices could head south to US$50 (RM205) per barrel next year as a result of prolonged trade war conditions, or if surplus capacity is exhausted to compensate for the anticipated supply short-falls in oil markets, according to IHS Markit Ltd.

Its Energy group VP Victor Shum said the Donald Trump- led US administration’s efforts to change the rules of the global marketplace are creating a wide spectrum of oil price paths, with trade war conditions and rising crude oil prices posing the biggest downside risks to the market.

“Trade tensions (between the US and China) evolving into an outright trade war could cut deeply into the global economic growth and bring oil demand growth to a standstill.

“If producers attempt once again to restrain output but are unsuccessful, Brent crude oil price will be sent into the US$50 per barrel level in 2019,” Shum said during the Asia Petrochemical Industry Conference 2018 (APIC 2018) in Kuala Lumpur yesterday.

Alternatively, a production shortfall resulting from the re-imposition of US sanctions on Iran coupled with output disruptions in Venezuela and Libya will also put downward pressure on oil prices.

Shum said this is expected to remove a total of three million barrels of oil a day in the market which the three major Arab Gulf producers — namely Saudi Arabia, Kuwait and the United Arab Emirates — will be eager to fill by exhausting their spare capacity.

“But as the Arab Gulf producers raise production, spare capacity of these three producers will fall from 2.5 million barrels a day in the second quarter of this year (2Q18) to 1.8 million barrels a day in 4Q18,” he said.

He said this is a thin margin for oil markets and could cause prices to spike to US$100 per barrel. In turn, it could intensify economic headwinds and weaken oil demand growth considerably.

This will push prices back down to US$60 per barrel by end-2019, he said.

At present, Shum said prospects for world oil demand growth remain bright, but these two scenarios are big downside risks to the market.

As a base case, IHS Markit predicts Brent crude oil prices to range between US$75 and US$85 per barrel on a quarterly basis up to end-2019.

Crude oil prices are currently trading above the US$70 per barrel mark on the Brent index. A correction towards the US$50 per barrel level will be a reminder of the volatility of oil prices and its susceptibility to supply and demand dynamics.

Following the global economic crisis in 2014, oil prices were sent crashing to the US$50 per barrel mark from the previous US$100 per barrel highs.

Prices have since recovered on OPEC-led production cuts coupled with recovering demand and the significant drawdown in inventory levels, while US shale output kept topside gains in check.

Shum was speaking at the two-day APIC 2018 event which emphasises the theme of collaboration between industry players for value creation, while addressing concerns facing the petrochemical industry.

IHS Markit global business development VP Mark Eramo said the higher crude oil environment augurs well for the petrochemical industry as a high oil price floor coupled with low natural gas prices creates an attractive spread for investments.

“The chemical industry will likely carry a strong profit momentum into the 2020s (assuming a global growth of 3% going forward), while strong demand and limited supplies are driving an extended upcycle to record length,” he said.

However, he cautioned that risks to the forecast are rising as crude oil prices continue to trend upwards, fluctuations are observed in currency markets, interest rates remain on the rise and on prospects of a full-scale trade war developing.