COVERAGE AREA and macrothesis
Despite the rapid oil production decline in Venezuela and lower volumes of Iranian crude exports due to U.S. sanctions in CY 2018, OPEC was unable to prevent the global oil market from becoming oversupplied. The principal driver, as in 2014, appears to have been fast-growing U.S. production. A similar dynamic could occur in CY 2019. In our view, Saudi Arabia appears to be the only OPEC country with material amount spare production capacity, putting responsibility to balance the oil market squarely on the Kingdom.
Global demand growth, which was driven by rising gasoline and diesel consumption for most of the decade, now appears to be primarily supported by second-tier refined products including jet fuel and LPG, according to International Energy Agency data. In addition to currency-driven pressure on non-dollar crude importers, we would also suggest that trade war could further compress consumption by weakening industrial and logistics demand. Moreover, although we cannot quantify the invisible and the counterfactual, we might also suggest that investment decisions delayed by trade uncertainty could deliver downside demand surprises.
Growing liquefied natural gas (LNG) volumes have tightened links between the world’s three principal gas markets (North America, Europe and Asia). We expect the U.S. to drive global gas production growth in the coming years, primarily in the Appalachia and Permian regions, at the same time that China maintains its leadership position for global demand growth. We expect Australia, Qatar and the U.S. to account for ~50% of global liquefaction capacity in CY 2019.
Although LNG supplies only a little more than 10% of global gas consumption, U.S. export cargoes have, in our view, come to exemplify the Trump Administration’s “energy dominance” agenda. This may create opportunities, but also risks. At the same time that U.S. Government-facilitated market access can expand U.S. exporters’ geographic opportunity sets, perceived linkages between private firms and the U.S. Government could make LNG into a trade or sanctions reprisal target.
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Updated: December 24, 2018.