- Oil price forecasts revised higher : Brent to USD 85-95/bbl in H1 2019
- Brent/WTI price differential between will remain high (USD 10-15/bbl)
- Strong gas demand provides support; TTF gas prices will remain high
Warning for oil shortages led to more support for prices
Recently, the International Energy Agency (IEA) asked OPEC and other major oil producers to increase their oil production. The IEA pointed at the negative effects for the global economy if oil prices continue to appreciate for too long too far. Also US President Trump continuously calls for more OPEC oil production in order to stop the price rally. According to the IEA, the higher oil price comes at a time that the global economic growth is losing momentum. The latter seems also to be confirmed in the recent OPEC forecasts. OPEC revised its 2019 demand expectations lower based on its expectations for a slowdown in economic growth. Still, OPEC believes that global demand will reach slightly more than 100 million barrels per day (mb/d) in 2019. However, OPEC does not see the urgent need for a rise in oil production, especially with oil prices currently trading at comfortable levels.
Also Iran sanctions affect oil prices
Oil prices rallied recently due to market expectations regarding the negative effects of US sanctions against Iran. These sanctions against the energy sector will lead to a further reduction of Iranian oil exports. The first signs of a slowdown are here already. However, there are also signals that the majority of its exports will continue to reach the end consumers (especially in India and China) and there were some rumors that the sanctions may not be as harsh as initially announced. Having said that, the sanctions will only come into effect on 4 November and seem unchanged compared to the proposals. So, the actual impact must still be seen. A further decline of Iranian oil exports is expected, especially for the exports towards Europe. This comes on top of the existing production disruptions within OPEC like the ongoing decline in production in Venezuela and the uncertain crude exports from Libya. These production disruptions can be balanced by increased production by Saudi Arabia. However, this does lower its reserve capacity. As a result, OPEC / Saudi Arabia may not be able to increase production in case of new production calamities. This is something which normally makes investors nervous and should be supportive for oil prices. Finally, the infrastructure capacity problems in the US are also starting to have an effect on the growth of global oil supply.
Market speculation can provide support
Besides supply related issues we see more market drivers which can push oil prices higher in the coming months. The expectations for new price gains have not translate into more long positions yet. However, as soon as investors \start to anticipate possible shortages in the market by entering new longs, more support for oil prices can be seen. Finally, technical analysis also provides a positive outlook for oil prices after the recent breaks of crucial resistance levels. Especially for Brent oil but also – in a lesser extent – for WTI. A higher oil price will have a dampening effect on global oil demand in the end. However, so far we haven’t seen these effects yet. Oil demand remains solid and will continue to increase in 2019 as well, only in a slightly lower pace. IEA revised its 2018 global demand growth forecast lower to 1.3 mb/d, from 1.4 mb/d earlier. Its 2019 forecast for demand growth remained unchanged at 1.4 mb/d. We have also seen that market speculators lowered their net positions in recent months.
Oil prices forecasts revised higher
Based on the analysis as described above, we revised up our oil price forecasts in August. These drives remain unchanged while in the meantime oil prices have gained significantly. We still expectfurther price gains in our base case scenario. As a result, we revise our oil price forecasts higher again. For Brent we now expect a year-end price of USD 85/bbl (earlier USD 75/bbl). For the first half of 2019 we expect oil prices to trade within a trading range of roughly USD 85-95 per barrel (earlier USD 80-90/bbl). In the second half of 2019 there could be more room for a downward correction to around USD 80/bbl at the end of 2020.
Also for WTI we expect further upward potential due to a spillover from the sentiment in Brent oil. Nevertheless, the support for WTI will be less strong due to the high (shale-)oil production in the US. The capacity to transport the produced crude (and gas) from the production wells to the export locations runs at its maximum. In other words, it becomes harder and harder to increase exports. This leads to extra storage and caps the upside potential of WTI crude prices. This trend seems to be confirmed by the recent inventory data provided by the Energy Information Administration (EIA). These figures were seen as a reason to take some profit on recent price rallies. Currently, new onshore infrastructure capacity is being built but this will not become available before 2020. We believe that the price difference between Brent and WTI will remain between USD 10-15/bbl in 2019.
European gas prices (TTF) significantly higher
The Title Transfer Facility (TTF) gas price gains significantly due to several reasons this year. The rally was partly the result of seasonal demand for electricity due to the hot summer (air conditioning demand). Furthermore, we saw recently increased demand for refilling of the gas storages ahead of the winter demand season. The strong appreciation of the TTF gas price was also supported by the increased prices for EU ETS carbon emission rights and the sentiment in other commodity markets like coal and oil. This pushed the TTF gas price (1st contract) to a high of EUR 29/MWh. A level we had not seen since 2013.
By now, the European (and Dutch) gas inventories are back to normal pre-winter levels. Although the TTF gas price eased somewhat in recent weeks, we still expect that these prices will remain at relatively high levels based on the mentioned arguments. As a result, we revised our TTF gas price forecasts higher. Not only for the near term, but also the longer term outlook up to 2020. That is mainly based on the new decision by the Dutch government to reduce the Groningen gas production at a faster pace, and the consequence of higher dependency on gas imports. On top of that, we expect the uptrend of the EU ETS carbon emission prices to continue as well.
US Henry Hub gas price shows a similar pattern, but upside risks are limited
In line with the trend seen in Europe, also US gas inventories dropped significantly over the summer. This drop was triggered by increased demand for gas used for electricity in households (airco) as well as increased industrial demand. As a result, inventories are currently lower than the average levels of recent years. Gas demand is expected to remain strong during the coming weeks as inventories are being filled again. After that, demand may ease somewhat until the winter season kicks in.
The US gas production is expected to continue to increase even further during the coming years. Nevertheless, we don’t expect that this will add pressure to gas prices as the coal-to-gas switch for power generation will lead to a rise in gas demand at a similar pace. As a result, US coal demand will remain under pressure. We are comfortable with our current US Henry Hub natural gas price outlook for 2019 and 2020. This reflects a trading range of roughly USD 2.75-3.25/mmBtu. Due to the recent price rally we do revise our Henry Hub 2018 year-end forecast to USD 3.25/mmBtu (from USD 2.75/mmBtu).