KEEP CALM & CARRY ON
Keeping calm and carrying on has certainly been the theme for oil & fuel markets in the U.S. and abroad. As consumers around the globe appreciate lower, fuel prices and ride the tail end of a bull market, it’s hard to tell where the price of crude oil will be in 2020 both globally and domestically.
The U.S. Energy Information Administration (EIA) expects domestic crude production to increase 1 million barrels a day in 2020. Some other independent market consultants feel that may be too bullish considering the steep drop in drilling activity and tight, financial discipline seen in the U.S. oil industry this year. “Many shale producers continue to have a difficult time breaking even under today’s oil prices, and investors have become fed up with capital destruction in the sector. Oil service companies have taken significant steps to improve razor-thin margins, laying off workers, reducing drilling and fracking capacity and of course re-thinking their business models”, says analysts from Forbes. Some drillers and fracking companies have seen their credit lines reduced, limited access to fresh capital and this curtailment in lending is at the expense of shareholders and investors. Twice a year in the spring and fall, banks re-access their credit lines to shale drillers and decide how much they’ll authorize companies to borrow. This will be the first time in almost 3 years that lenders have tighten their preverbal belts. As a result, drillers have been forced to optimize margins, profits and dividends at the expense of capital growth to avoid a complete nose dive in stock prices.
To give some perspective, OPEC crude oil production in 2019 was roughly 29.9 mb/d expected to decrease to 28.9 mb/d in 2020. On the flip, non-OPEC crude oil producers output is expected to grow to 2.3mb/d in 2020, an increase 500K b/d. So, with decreases in OPEC production growth added with stagnant or uncertain U.S. drilling growth and continued sanctions on Iran, Lybia and Venezuala, the new year could bring a slight rise in oil prices, but most likely we’ll see price levels similar to 2019.
The IEA World Energy Outlook 2019 published this week highlights the increasing disparity between calm oil markets of today and heightened geopolitical tensions. The calmness is supported by a well-supplied market with high inventories. (PADD 4 in the Rocky Mountain region has experienced, despite some swings of inventories, a relatively uneventful market due to declining demand.) Given the cyclical nature of refining, oil producers have oversupplied the market in past years and decisions at the recent OPEC meetings in December 2019 are to cut production and clear the product globally. The U.S. will again lead the way in supply growth in the new year along with Brazil, Norway and barrels from new producer, Guyana. However, oil demand globally is still relatively unchanged @ 1-1.2 mb/d and the health of the global economy remains a bit uncertain given the US-China trade dispute.
A ramp up in refinery activity sets the stage for smooth IMO 2020 implementation of new bunker regulations in January 2020. Port, ship owners and refiners and hubs in Rotterdam, Fujairah, and Singapore have stepped up their preparations. (In the case of Singapore, one of the top 2 Ultra Large Crude Carriers in the world is being used to store low sulphur fuel oil and marine gasoil offshore.) As a result of these implementations, some negative consequences may occur: the cost of high sulphur fuels will likely plummet and compliant suppliers may not be available in sufficient quantities in smaller ports and for smaller ships certainly creating dislocations and lack of needed supply driving prices up.
Continued production and now an oversupply since 2018 has led to abundant inventories and the forward, price futures’ curve into contango (where price futures are higher than the spot price, although signifying a rise over time). As demand expectations and sector sentiment grow and OPEC+ maintains discipline over production levels, we may see market fundamentals resulting in average prices in the US60-70/bbl range until 2020. After 2020, prices are estimated to remain closer to USD60/bbl driven by increasing and sluggish demand and the continued growth of shale oil in North America as operators lean toward shorter-lead, higher margin projects. (Unfortunately, credit markets won’t allow producers to go all in on capital investments or longer-term projects due to lending scrutiny) In the scenario where the global economy slows down even more, prices could continue to fall if OPEC chooses not to intervene and make the cuts necessary to keep prices higher. On the contrary, prices could balloon and reach USD80-90/bbl with supply disruptions from a shipping industry that may not be fully prepared for their low sulphur fuel transition. Additionally, drops in production from Iran and Venezuela and OPEC’s spare capacity tightening could send prices higher as well.
Again, the theme still suggests all of us to remain calm and carry on. Despite the US/China trade war, the readiness of the global shipping industry, and decreasing global growth, we’re still unsure how this affects our business at home. The Rocky Mountain region is subject to terminal functionalities and capabilities, supply accessibility in the region, competitive suppliers in the market and a host of other factors (like weather) that will affect your fuel in 2020. The western U.S. still continues to see growth in the Front Range of Denver, Salt Lake and other smaller markets like Boise, Idaho. With that growth comes demand for goods, services, and homes which drives construction and infrastructure improvements. Transportation companies and construction contractors will experience a growth in demand for all sorts of fuel and petrochemicals to run and maintain fleets and equipment across the region as this trend continues across the region.
World Kinect Energy Services continues to be at the forefront of fuel management, supply and delivery services across the region and U.S. No matter what the market conditions, we continue to have advantageous supply positions, will provide the best prices and exemplary services helping customers benefit from a prosperous New Year.
Gates L. Scott
Gates L. Scott is a Senior Land Executive with World Fuel Services developing new markets and delivery fuel management solutions through the Front Range of Colorado and beyond. A former Certified Flight Instructor and commercial helicopter pilot and aviation enthusiast, he loves anything that flies!
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