Wednesday, June 19, 2019 /08:12PM / By Fitch Ratings / Header Image Credit: Finance Asia
Increased geo-political tensions and economic uncertainty are likely to contribute to oil price volatility, but our year-average base-case expectations remain unchanged, Fitch Ratings says. We have lowered our natural gas price assumptions, reflecting reduced marginal production costs in the US and increased LNG supplies globally.
The toughened sanctions against Iran, production declines in Venezuela and the conflict in Libya contributed to Brent price recovery to around USD75/bbl by end-April from USD50/bbl at end-2018. However, the price fell to USD60/bbl in early June due to deteriorating expectations for global economic growth and increased trade war risks. We expect the global economy to decelerate from 3.2% in 2018 to 2.8% in 2019 and 2.7% in 2020.
Nevertheless, we expect OPEC+ to continue to manage supply to avoid large supply-demand imbalances. We believe that the OPEC+ deal will be extended until at least the end of this year, though its parameters could change. As a result, we expect the market to stay broadly in balance, and assume annual average prices will remain in line with our existing base-case assumptions. Year-to-date average prices (Brent: USD66/bbl) are consistent with our assumption of USD65/bbl for 2019.
Many large Middle Eastern producers (such as the UAE and Kuwait) should be able to balance their budgets comfortably under Fitch's base case assumptions for 2019-2020, except Saudi Arabia, the "swing" producer. Saudi Arabia requires Brent to be priced above USD80/bbl, hence its decision to produce below its OPEC+ quota, putting upward pressure on crude prices.
In the longer term we assume average prices to moderate to USD57.5/bbl for Brent and USD55/bbl for WTI as OPEC+ policies may become less efficient over time. The differential between Brent and WTI will narrow as transportation constraints gradually ease. We expect US upstream companies to remain profitable at these price levels, assuming the current cost base and achieved efficiency gains. We expect production growth in the US to meet most of the additional global demand in the next few years as it does now. At the same time the responsiveness of US shale to current prices makes the scenario of oil prices falling consistently below USD50/bbl significantly less likely.
We have lowered our base-case assumptions for Henry Hub and the National Balancing Point (NBP) gas prices across most periods. The new Henry Hub assumption of USD2.75/mcf reflects increased associated gas production and improved US Gulf Coast pipeline access, which have helped to reduce the marginal cost of natural gas supply.
The updated NBP prices reflect the increased links between regional natural gas markets and LNG trade, and the decoupling of European gas prices from oil. Competition between LNG and pipeline gas in Europe has intensified as global LNG demand has failed to meet recent capacity additions. The NBP price is subject to substantial fluctuations, some of which are seasonal. In 2019 we expect the NBP to average substantially lower than our previous assumption. NBP plunged to below USD4/mcf in early June from USD7.6/mcf at the beginning of the year, but we expect European gas prices to rebound in 2H19 once LNG importers begin procurement for winter.
In the medium term, European and Asian spot gas prices are likely to improve as excess LNG supply in 2019 and potentially 2020 will clear up. Supply-demand may even turn to deficit in 2021-2022 on insufficient global investments in new LNG projects in 2016-2017, while gas demand will continue to grow.
The adjustments to our stress-case oil prices in 2019 are mostly technical and reflect average prices achieved to date. The adjustments to stress-case gas prices are equivalent to the reduction in base-case gas price assumptions and are driven by the same factors.