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The biggest threat to the stability of the oil market



The oil market should be more balanced this year, although the "policy risk" will be a much greater driver for oil prices than the underlying fundamentals, according to a new Standard Chartered report.

Brent crude started the year repairing the damages of the epic crisis in the fourth quarter, but in recent weeks oil prices have recovered. Standard Chartered sees Brent rise much further, averaging up to $ 74 per barrel this year, before averaging up to $ 83 per barrel in 2020.

However, this forecast depends on a variety of key policy decisions. First, OPEC + must maintain its production cuts, and in fact the group should limit production to January levels. If they can handle that, then global crude inventories would only rise at a minimum of 0.1 million barrels per day (mb / d), according to Standard Chartered.

That would lay the foundations for a better situation for OPEC + next year. "Given that OPEC growth is expected to be limited outside of North America, and that the United States' oil supply is expected to decrease significantly, we believe that OPEC will be able to increase production by 0.5 million barrels. per day (mb / d) in 2020 without unbalancing the market, "Emily Ashford and Paul Horsnell wrote in a Standard Chartered report

While the fundamentals of supply / demand seem to be "benign" in the face of OPEC + market management, an additional "policy risk" could have an unreasonable impact on prices.

Standard Chartered highlighted the US government. UU As a major source of volatility. "If balances were the sole driver of OPEC's production policy, the scenario would have been set for a relatively quiet year," the investment bank wrote. "However, there is a disruptive factor in the market that is likely to complicate policy choices; The politics of the United States has become more difficult to predict. " Related: The discovery of oil in South Africa could be a game changer

After a quiet first year of President Trump, 2018 was markedly different. "13 tweets about oil that move in the market expressing a strong desire for lower prices, significant developments in the policy towards Iran and Venezuela, and the feeling that the national energy policy is in a period of substantial flow," he wrote. Standard Chartered. "We believe that the oil market, oil producers and oil analysts have yet to fully adapt to the uncertainty and policy risks injected into the oil market by Trump's presidency."

There is very little clarity about the amount of oil that will be lost in Venezuela and Iran, for example, and the White House has a great influence on these issues. As of now, the USA UU They are pressing Venezuela as hard as possible, effectively preventing both the importation of Venezuelan oil and the export of US diluents. UU To the country. That puts a large part of Venezuela's oil production at risk.

The reports of inactive tankers both on the coast of Venezuela and on the coast of the Gulf of the United States testify to the interruption that is already underway. Undoubtedly, the New York Times reported that Russia is sending some shipments of fuel to Venezuela to help PDVSA process its heavy crude, which could help prevent catastrophic losses. However, the declines are expected to continue. The question is how much?

As for Iran, the US They have clearly expressed their desire to take a harder line. According to all accounts, the government does not plan to issue new exemptions for sanctions, with the stated goal of making Iran's oil exports to zero. Currently, around 1 mb / d, reaching that goal would be a large loss of supply.

The problem is that Trump's goal of regime change in Venezuela conflicts with his Iran policy. In short, it will be difficult to close production in both countries without the crude oil prices rising significantly. If something is true when it comes to Trump's whims and desires, it's that he wants low gas prices. It is not clear how he achieves that while simultaneously surrounding and closing the oil industries in both Venezuela and Iran. Related: Washington Eyes Crackdown in OPEC

Beyond Venezuela and Iran, another source of great uncertainty is the global economy. The trade war between the United States and China may be in abeyance, but it is a few weeks before the deadline for an agreement is reached. An increase in tensions could make the world economy become a kneecap, and it is a decision that depends entirely on Trump.

However, it's not just Trump. Another level of uncertainty will come from the implementation of regulations on marine fuels by the International Maritime Organization (IMO). The concentration of sulfur in marine fuels will have to fall from 3.5 percent to only 0.5 percent by January 2020, which could cause some disruption in the refined fuel markets. In fact, the margins for gasoline and diesel have already diverged significantly.

This is a fairly long list of important policy decisions and efforts that complicate any price forecast, and in fact, question the utility of trying to predict oil prices in this environment.

As Standard Chartered pointed out, if we simply extrapolate the OPEC + cuts forward, we can conclude that the inventories would be mostly balanced, resulting in "a quiet year" for oil.

However, even though OPEC + exerts a huge influence on oil prices, the oil market is at the mercy of a handful of political decisions, many of which will be taken by the United States government.

By Nick Cunningham of Oilprice.com

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