Baku, Azerbaijan, Oct.18
By Leman Zeynalova – Trend:
Fuels demand – which had been growing above-trend for several years – has shown signs of fatigue in 2018, according to the report of Fitch Solutions Macro Research (a unit of Fitch Group).
“That said, our economists remain sanguine on the prospects for the global economy, which should keep fuels demand growth firmly in positive territory. Growth had been abnormally strong, in particular in developed markets, and based on our economic outlook, we view the recent downtrend as a normalization to the post-global financial crisis trend rate of growth, rather than a sign of structural weakness,” said the report obtained by Trend.
The company said oil is a risky asset and is exposed to broader financial market (i.e. non-fundamental) trends.
“The crude demand outlook for 2019 and 2020 is stronger than the outlook on fuels. This ties to the implementation of the International Maritime Organization’s (IMO) 2020 sulphur cap, which will trigger a swing in consumption - around 2.5mn b/d - away from high-sulphur fuel oil, towards low-sulphur alternatives,” said Fitch Solutions.
“Supply is looking increasingly constrained next year. Part of the issue has been the sharp fall in investment since 2014.”
In addition, Fitch Solutions estimates that spare production capacity has fallen substantially, with the unwinding of the OPEC+ production cut deal. “Combined, these remove important buffers from the market and leave prices vulnerable to any shock on the supply side, such as from Iran.”
OPEC producers - including Saudi Arabia, UAE, Kuwait and Iraq - are, alongside Russia, increasing output to offset losses elsewhere in the group, said the report.
“Activity in these markets has begun to pick up and the resources exist to support higher output. However, these barrels require drilling and investment to bring to market. Excluding Saudi Arabia, the bulk of the group’s flexible supply (i.e. s pare capacity) has now been exhausted,” said the company.
The company analysts point out that on paper, Saudi Arabia has sufficient capacity to keep the market in balance. “The costs involved in bringing its full capacity online, though, would likely outweigh the benefits, not least due to the high capital requirements and uncertain demand outlook.”
That said, small swings in production in Saudi Arabia can have an outsized impact on sentiment and prices and the kingdom has often managed the market, without physical adjustment to its production, according to the report.
“It will likely attempt to do so again, over the coming quarters. The US will be the dominant growth market over 2019 and 2020, adding around twice the number of barrels as Saudi Arabia, according to our data,” said the report.
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