Expect volatility in oil prices next year, says Petronas


Petroliam Nasional Bhd (Petronas) expects the global oil price to continue to be volatile next year, but it remains cautiously optimistic especially on new capital projects.

In the company’s annual Activity Outlook (PAO) report for the period 2019-2021 re- leased yesterday, the state-owned energy company said “the year 2018 has seen greater volatility in oil prices, which is expected to increase in 2019”.

“Petronas in this edition of PAO maintains its prudent view on the industry outlook and will respond with cautious optimism, particularly on new capital projects,” the oil company said.

The report shares Petronas’ perspective on industry trends, demand outlook and activities in the upstream and downstream sectors, and to assist the industry to strategise and better manage its resources and investment decisions.

Its group procurement VP Samsudin Miskon (picture) said Petronas is pleased with the positive response from the oil and gas (O&G) industry towards the PAO 2018-2020.

“(This), considering that Petronas has taken a bold move in pushing for transparency in information in the hope that the industry is able to respond, especially with strategic collaborations, to seize opportunities and find long-term solutions,” Samsudin said.

According to the report, oil prices have exhibited greater volatility despite improvement in price level since the last update of the PAO 2018-2020.

“In 2018, Dated Brent has averaged US$72 (RM305.31) per barrel (as at Dec 7, 2018), compared to average 2017 price of US$54 per barrel, a 33% annual increase.

“Oil prices have been fluctuating in 2018 from year-high of US$86.20 per barrel in early October to lowest of US$57 per barrel at the end of November as the global oil market turned from tight to oversupply,” the report said.

It said the extension of production cut by OPEC+ to end 2018 has managed to stabilise the global oil market.

“Commercial oil inventories for the Organisation for Economic Cooperation and Development (OECD) countries have declined sharply to below the five-year average of 2.8 billion barrels in March 2018.

“However, towards the end of the year, the global oil market turned into a surplus, resulting in oil prices weakening to below US$60 per barrel. This was driven by demand concern and increased supply from the US,” the report said.

The report noted that production from the US continues to grow, hitting a record-high of 11.7 million barrel per day (bpd) in November 2018 to an average of 10.9 million bpd in 2018.

“OECD oil stocks increased by 63 million barrels from March 2018 to 2.9 billion barrels at the end of the third quarter of 2018, indicating a surplus market.

“On Dec 7, OPEC+ pledged to extend the production cut to June 2019 with participating members in OPEC reducing output by 800 kbpd and non-OPEC 400 kbpd, with the intent to stabilise the oil market.

“However, the growth of US tight oil production and expectation of global oil demand growth, amid the concern on trade war and weakening emerging markets’ (EMs) currencies will influence the global oil market in 2019,” according to the PAO 2019-2021.

The report pointed out that US sanctions on Iran could remove between one million bpd and 1.5 million bpd of oil from the market.

On May 8, 2018, the US re-instated sanctions on Tehran after Washington withdrew from the Joint Comprehensive Plan of Action, commonly known as the Iran nuclear deal.

For this round of sanctions, the US toughened its stance by asking several countries to reduce Iranian oil imports to “zero” by Nov 4, 2018.

Post the deadline, the US granted waivers to eight countries (China, India, South Korea, Japan, Italy, Greece, Taiwan and Turkey) to import oil from Iran for another 180 days.

“It is one of the factors that had led the oil price to fall from US$86/bbl in early October to a range of US$60/bbl in November 2018 as the waiver had put a bearish sentiment to the oil market, reversing the earlier sentiment that the market could tighten further.

“At the time of this report (November 2018), there is still some caution on the waivers as they are only temporary, expiring in March-April 2019.

“Extension of the waiver will depend on the US outlook on the oil market balances and the volume the countries are allowed to import from Iran.

“The countries still need to prove they are diversifying away from Iran,” the report stated.

The report also noted that there could be a risk of slowdown in oil demand.

“Oil demand growth is expected to be at risk as soaring oil prices and weakening EMs’ currencies could lead to higher oil import bill.

“There is also a risk of demand erosion due to escalation of trade disputes between the US and China,” the report said.