By Sebastine Obasi
Global oil demand growth is accelerating to 1.26 million barrels per day (MMB/D) in 2020, up from 0.95 MMB/D growth in 2019, with growth expected in all regions except Western Europe and Japan, S&P Global Platts, the leading independent provider of information, analysis and benchmark prices for commodities and energy markets, stated in their 2020 outlook, just released.
About 20 percent of that projected growth in oil demand is associated with the International Maritime Orgamisatio, IMO, bunker-fuel specification change, which will push high-sulfur fuel oil, no longer allowed for use in maritime shipping, into power generation, requiring more middle distillates and low-sulfur fuel oil to satisfy demand in the shipping sector.
Demand growth will be increasingly reliant on emerging economies and led by distillates in 2020. Jet fuel demand is forecast to rise by 140,000 b/d. In addition, it may benefit from the return of the 737 Max airline fleet, which curtailed airline demand by as much as 1 percent in 2019.
Weather is set to become more prominent in setting energy demand. Despite a rosier outlook for the global economy, supported by a weaker dollar and more constructive trade talks, weather will have a greater impact on energy commodity demand, the report stated. Heating and cooling can swing demand significantly as total global energy consumption grows, and agriculture cycles (monsoons, flooding, and drought) affect harvests and climate events (hurricanes and typhoons) affect economic activity.
The report also stated that low oil inventories, deeper Organisation of Petroleum Exporting Countries, OPEC-plus output cuts and IMO 2020 will see crude oil prices rise in early 2020, with the price influence of IMO 2020 expected to peak in March-May. This strength will likely enable Brent to break above $65/barrel, before falling back to the low $60s/barrel by end-2020 as IMO support fades. West Texas Intermediate (WTI) crude will likely break through $60/barrel in early 2020, before dropping back to the high-$50s/barrel, it stated. According to the report, the impact of IMO 2020 will favour sweet This will result in Dubai sour crude trading at a premium, squeezing Asian refinery margins and narrowing the Brent-Dubai spread.
Overall refinery margins will strengthen in 2020, driven by strong gasoil prices due to enhanced demand for distillates. However, Asian simple-refinery margins will be negative, reducing exports of gasoil to the West and tightening European inventories. This will require stronger simple-refinery margins in Europe to balance demand. The overbuild of refinery capacity in Asia and trend towards crude-to-chemicals refineries will ultimately narrow Asian refinery and petrochemicals margins as the current golden age of refining comes to an end in 2020.
The report cautioned that geopolitical risks to oil supply will remain elevated in 2020, as both the United States and Iran continue their maximum pressure campaigns. Sanctions relief looks unlikely before the November 2020 US presidential election, although US sanctions policy has proven unpredictable. Libya, Iraq and Nigeria remain as identifiable downside production risk in 2020. For the United Kingdom, the looming general election and its repercussions for Brexit remain a key risk, with implications for the UK’s participation in the European Union Emissions Trading Scheme and UK’s overall carbon price.
The China/US trade war and the African Swine Fever crisis in Asia will continue to impact agriculture, the latter having a significant impact on soybean demand until it can be resolved. However, after three years of sugar supply and demand surpluses globally, the world is headed to a deficit of 6 million metric tons, putting sugar in the spotlight, and likely to drive ethanol prices higher, the report added.