Business Outlook 2019

BUSINESS OUTLOOK 2019

The volatility within the market in 2018 was the result of an ever-changing supply and demand picture, heightened by geopolitical tensions. Global economic growth forecasts, a key indicator of oil demand levels, have been revised down for both 2018 and 2019. 2 The impact of the ongoing US-China trade war is a primary factor in the concern over a potential economic slowdown, acting to dampen oil demand. Demand uncertainty is being compounded by continued supply volatility. This is driven by factors such as the continued growth of US shale output — with ExxonMobil and Chevron announcing that they expect to see continued growth until at least 2024— the re-imposition of US sanctions on Iran, and ongoing economic challenges in Venezuela, along with OPEC restrictions. With supply and demand uncertainty persisting the forward price curve for Brent crude, shown in Figure 2, demonstrates that any sustained increase in price is unlikely, at least in the short term. Throughout 2018 the market swung between backwardation — where current spot prices are higher than prices for future delivery — and contango, where prices for future delivery are higher than the current spot price. In late 2018 the market shifted into contango, demonstrating that there are still widespread concerns around oversupply, acting to dampen prices.

Figure 2: Brent Futures Prices

120

Start 2014

100

Mid-2016

80

Start 2019

60

40

Brent Futures Contract Price ($/bbl)

20

0

2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

Source: CME Group, Intercontinental Exchange

Examining the price for delivery of a barrel of Brent crude in early 2020 suggests little upside in prices. A futures contract for 2020 delivery purchased in early 2014 (when spot prices were greater than $100/bbl), prior to the market crash, would have cost around $85/bbl. In mid-2016, at the height of the downturn, this was trading at just under $56/bbl (with spot prices of around $45/bbl). In January 2019, delivery in early 2020 was trading at around $61/bbl, in line with the spot price at the time.

2 www.imf.org/en/Publications/WEO/Issues/2019/01/11/weo-update-january-2019

10