PORTLAND
MARKET
REPORT
July update
As we reach the mid-year point of 2019, let’s
consider how oil markets have fared since the
beginning of the year and let’s also see how
Portland’s 2019 prediction of a $65 per barrel
oil price is looking.
When we put together our January 2019
report, we were fairly confident that having
crashed massively in Q4 2018 (down $30
per barrel), oil prices were unlikely to fall any
further. In fact, prices didn’t just stabilise, they
seriously bounced back the other way. At the
start of the year, Brent Crude was trading
at $53 per barrel and by the end of the first
quarter (March 31st), oil had reached $68 per
barrel. However since that point, markets have
struggled for direction either way and have
largely remained around the mid $60’s mark.
The reasons for the rapid correction
upwards in Q1 were fairly obvious. Ongoing
demand growth from India and the Far-East
created a largely bullish air (prices up) and this
demand-driven backdrop was coupled with
2 key factors on the supply side; continued
discipline from OPEC in maintaining production
cuts and Venezuela’s worsening (if that were
possible) economic situation.
Historically, production cuts by OPEC
have been poorly maintained, with public
declarations (“we will now cut production”) not
matching operational reality (“let’s maximise
production to take advantage of rising oil
prices”). But this time around, OPEC’s restraint
has been impressive and almost all members
of the cartel have stuck firmly to their allocated
quotas. In addition, the biggest player of all
has actually constrained production below
targeted levels, with Saudi Arabia producing
only 9.8m barrels per day (bpd) in April, even
though the country is permitted to produce
10.3m bpd.
Venezuela’s production woes are
calamitous and probably worthy of an update
since the last time we looked at this country
(see Fuel Oil News April 2013 edition). The
South American oil giant is the world’s longest
established oil producer, has 20% of proven
global oil reserves and is an OPEC member.
Despite having a production quota of 2m bpd,
“OIL MARKETS ARE ONCE AGAIN
TEETERING ON THE EDGE OF A
MAJOR PRICE SURGE”
such is the desperate state of the economy
(and the oil industry within in), that volumes
this year have dropped to below 400,000
bpd. Frequent electricity power outages are
shutting down production facilities on a daily
basis, whilst refineries stand idle waiting
for maintenance and new parts, that can
no longer be afforded. Product embargoes
prevent export flows, whilst those ships that
are permitted to trade with Venezuela are
struggling to get alongside silted-up jetties that
have not been dredged for months on end.
“ANY DISPUTE BETWEEN
IRAN AND THE USA
WOULD HAVE SEISMIC
CONSEQUENCES ON OIL
PRICES”
These then were the clear bullish factors
in the market, that made a Q1 price recovery
inevitable. Holding things back once the
price got to around the $65 mark, was the
steady return of US shale oil and the on-off
US-Sino trade war. Shale oil production has
certainly been rising steadily in the USA
and previous over-capacity in this area has
generated massive price crashes (2014). But
as our January report pointed out, many shale
operators remain heavily in debt and struggling
to meet operational costs, which is naturally
curtailing the scale and speed of production
growth. As for the trade war between the
USA and China, this clearly has spooked oil
markets, because any downturn in global trade
would obviously reduce oil consumption. But
it does remain almost impossible to make
firm predictions on this one, because so much
depends on the individual and often erratic
actions of US President Trump. Probably the
safest conclusion is that neither the USA nor
China want a fully-fledged trade conflagration
and therefore once symbolic penal tariffs have
been placed (and counter-placed) on flag-
ship industries, then business as usual for the
vast majority of “under the radar” trade will
continue as normal.
If that was the case then there would be
few downward drivers of prices left, just as
one massive upward factor is now rearing its
very ugly head. Surprisingly few column inches
have been taken up by the looming potential
conflict between Iran and the USA (such is
our obsession with Brexit), but any dispute
between these two countries would have
seismic consequences on oil prices. The main
reason for this is the Straits of Hormuz, which
has a full fifth of the world’s oil consumption
(not to mention around 30% of the global
Liquefied Natural Gas trade) travelling
through it.
This bum-squeakingly tight shipping
lane provides only 6 miles of navigational
width for vessels, which is pretty narrow when
you are captaining one of the 30 ships that
navigate the straits daily – some of which are
over 400m in length. A blockade of the straits
by Iran would send prices sky-rocketing and
as a comparative example to illustrate this
point, 2011 civil unrest in Libya removed 2m
bpd from global oil markets. The result was a
spike in oil prices from an already inflated $90
per barrel to an incredible $126. Removing
20m bpd from global markets isn’t even
worth thinking about, but suffice to say that
oil markets are once again teetering on the
edge of a major price surge. For the moment,
there is just about balance between signals of
a bearish (trade war) and bullish (actual war)
kind. But as the prospect of one recedes, the
prospect of the other is advancing and until
tensions are eased in the Middle East, an eye-
watering price escalation remains a distinct
possibility.
For more pricing
information, see
page 26
Portland Fuel Price Protection
www.portland-fuel-price-protection.com
Fuel Oil News | July 2019 9