Page 18 - ISQ UK_October 2017

INVESTMENT STRATEGY QUARTERLY

A. It is safe to say the oil market, for the time being, is not remotely IMO 2020
focused on what will happen in 2020. However, it is important
to underscore just how impactful the IMO 2020 policy will be. Oil to Benefit from Structural Changes in
We estimate it will effectively erase 1.5 million bpd (or 1.5%) of Marine Transportation Regulations
global oil supply, a very meaningful supply reduction. Put
another way, this is as much supply impact as what Venezuela
has caused over the past four years. Some of this, in fact, will
likely be felt toward the end of 2019. ~4MM Bpd of fuel Unusable
needs to transition
To clarify, the total amount of high-sulphur fuel used in long- New Production
distance marine shipping is currently around 4 million bpd. Of
this amount, a portion will be processed in newly built units at Scrubbers
refineries and another portion will be handled by shipboard
scrubbers, which ship owners are in the process of installing.
There will be some “cheating,” at the risk of facing sizeable fines New Demand
from regulators, and, as noted earlier, some fuel will simply be
rendered unusable.

Another concern, given the dislocations that this may cause, is Current Diesel
Consumption
that some countries could try to back out of the new rules.
That, to clarify, is not legally possible because of the binding CURRENT 2020
nature of the underlying treaty known as the International
Convention for the Prevention of Pollution from Ships. Source: Raymond James Equity Research
Moreover, the IMO has made it clear that implementation will
not be delayed past January 2020. While visibility beyond 2020 is limited, our long-term forecast of
$75/Bbl WTI and $80/Bbl Brent reflects a “happy medium” of prices
Q. Putting everything together, what is your oil price that are high enough to enable the industry to sustain supply
outlook over the next 12 months and what growth but not so high as to sharply curtail demand.
wildcards could derail that outlook? As always, there are plenty of wildcards of which we need to be
A. Oil prices have already bounced back year-to-date from their mindful. For example, a sudden spike in the U.S. dollar would, all
recent lows but remain well below their 52-week highs. The else being equal, put downward pressure on oil prices. Similarly,
oil futures curve is relatively flat, indicating minimal upside a wide-ranging economic slowdown would naturally have a
from current levels over the next five years. We tend to stay negative effect on demand. On the flip side, there is always the
away from making short-term (weekly or monthly) commodity risk of unforeseen supply disruptions, such as what we mentioned
calls, but we are of the view that prices will be meaningfully earlier vis-à-vis Libya and Nigeria. Finally, geopolitical uncertainty
higher in the second half of 2019. swirling around Iran (U.S. sanctions, etc.) could potentially lead
to an even higher-impact disruption.
Our forecast for the second half of 2019 is for WTI to average
$70/Bbl and Brent $80/Bbl. Looking out to 2020, we think oil
will reach cyclical highs, with WTI averaging $93/Bbl and Brent Outlook WTI BRENT
$100/Bbl. To be clear, such prices would be unsustainably high on Prices CRUDE CRUDE
given the adverse impact on global demand (for example, Looking Ahead 2019 * $62/Bbl $72/Bbl
consumers shifting to smaller cars and electric vehicles). That, 2020 $93/Bbl $100/Bbl
in fact, is the whole point. We believe that oil prices in 2020 will
have to rise to levels that begin to put a damper on demand, in 2020+ $75/Bbl $80/Bbl
large part because IMO 2020 will create a temporary situation
of inadequate supply. Source: Raymond James Equity Research; *Full year price forecast

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