New US sanctions-related limits on Iranian exports and a return of managed money have the biggest potential to boost crude futures in 2019, a Societe Generale analyst said today.
Fears about slowing economic growth and general risk aversion drove a sell-off in crude markets in late 2018, Societe Generale global head of oil research Mike Wittner told the Argus Americas Crude Summit in Houston, Texas.
"The trigger was probably risk aversion — it had nothing at all to do with oil markets," Wittner said. The price move was exaggerated by crude market oversupply as well as an exit of institutional investors from crude futures, he said.
Societe Generale holds a cautious price outlook for the first half of 2019, with Brent trading at $60-62/bl, shifting to a more bullish outlook for the second half of the year, with Brent futures at a range of $65-70/bl. Nymex WTI futures should generally trade at a $7-8/bl discount to Brent through the year, Wittner said.
Crude futures purchases by hedge funds and other "hot money" investors hit a peak in the first half of 2018, but managed money net length is near the bottom of its range, Wittner said.
"Now there is upside potential — these players now have a lot of dry powder in their pockets," Wittner said. Managed money is looking for a catalyst to return to crude futures and "that catalyst we think will be fundamentals," he said, pegging the potential crude market impact of more institutional investor purchases at about $10/bl.
The Trump administration is also due in May to issue a new round of exemptions that would allow countries to purchase Iranian crude without triggering new US sanctions. Depending on the level of those exemptions, the price impact could be another $10/bl, Wittner said.
The biggest downside risk for crude futures will be the potential for a pronounced slowdown in global economic growth, which could carry a $15/bl impact on prices, Wittner said.
The price impact of US pipeline infrastructure constraints could rise later in 2019, Wittner said. Pipeline operators in the Permian basin of Texas and other key US production basins have countered rising congestion by adding drag-reducing agents and extra compression that allowed them to increase throughput of existing pipelines by about 5-10pc, he said.
But those efficiency gains have largely run their course and pipeline constraints could rise until about the third quarter, when three large pipeline projects from the Permian basin are set to come online, Wittner said.
Lee Fuller, executive vice president of the Independent Petroleum Association of America (IPAA), said that Congressional deadlock between Democrats and Republicans has empowered President Donald Trump to move forward with a pro-industry agenda.
The Trump administration's push to roll back environmental and other industry regulations enacted by previous administrations are "a good sign, but the reality is that is hard to do," because Trump's regulation changes will be litigated, he said.
Fuller predicted that Democratic candidates for the upcoming 2020 US presidential election will continue to focus on reducing or eliminating domestic crude and natural gas usage, with climate change initiatives as the litmus test for candidates' resolve.
Republican candidates will support oil and gas development but will not use climate as a core campaign issue, Fuller said.
