04 July 2019
The two-day OPEC+ meeting, which included Russia, concluded with a nine-month extension of an agreement to hold oil supplies out of the market through to 31 March 2020. This was longer than the market was expecting. The nine-month extension, as opposed to six months, is a recognition that oil demand in the first quarter of 2020 is likely to be seasonally weak and ending the agreement at calendar year-end would risk greater oil market instability.
Oversupply caused the collapse in oil prices in 2014 and will again be a key factor in 2020. The combination of OPEC+ supply returning to market and the continued growth in non-OPEC supply risks meeting tepid demand growth.
This leads us to believe that inventories could rise again by mid-year 2020 and that prices would then head lower. This estimate could be affected by geopolitical events causing severe disruptions or if US shale drillers stop focusing on growth and start returning the bulk of cash flows to investors.
Saudi production outlook
Saudi has been producing at around 4 per cent below quota in the first half of 2019 and the big question is what happens now. A huge supply raise would be required to get Saudi back on track to hit quota on a calendar year 2019 basis, which would clearly be bearish for the oil price.
However, comments made by Saudi energy minister Khalid Al-Falih at the press conference were positive in this regard: “The only way we can take inventories down is to constrain our production… if we need to be below [the 10.3Mb/d supply quota] then we will”.
Impact on credit markets
Credit markets have punished companies with high leverage and have effectively shut them off from raising new funds. We do not expect another wave of defaults similar to 2016-17, when over 100 companies defaulted, but we could easily see lower prices for energy related issuers.
However, there is still room for outperformance as low-cost structures and smart equity issuance can lead to rising stars such as Diamondback Energy and Aker BP.
Source: Fidelity International, Refinitiv, July 2019
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