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Total’s find was called a ‘game-changer’ but is oil really still as valuable?

2019-02-19 01:59

The recent gas discovery of about one billion barrels of oil equivalent in South African seas by French energy group, Total, has triggered widespread hope of a significant economic boost for the local economy.

Referred to as a potential game-changer by President Cyril Ramaphosa in his state of the nation address, the gas discovery is believed to attract as much as R1 trillion over the next 20 years.

However, global crude oil and gasoline prices have recently experienced their sharpest sell-off in more than a decade, and many investors are asking whether this national economic optimism around a gas deposit be somewhat premature.

While the sudden oil price plunge was more severe than anticipated, the supply response is expected to lead to a very strong recovery in 2019.

Despite what many investors think, oil demand is relatively resilient, even in the event of an economic slowdown.

So, to put into context our forecast for 2019 oil demand, it is important to note that oil demand in 2018 will grow at roughly 1.45 million barrels a day. We are conservatively forecasting demand growth of closer to 1.25 million barrels a day in 2019.

This growth comes almost entirely from non Organisation for Economic Cooperation and Development countries – OECD demand expected to be roughly flat in 2019.

After the fall in oil prices the Organization of the Petroleum Exporting Countries (Opec) and the International Energy Agency (IEA) have started to downgrade demand assumptions for 2019, driven by concern for generally weaker global GDP growth.

We have not yet seen demand weakness coming through in the reported numbers.

In fact, recent data shows record high Chinese refinery demand and a recovery in Indian oil demand to record high imports.

We also expect emerging market currency weakness to weigh on oil demand a bit, but this negative impact will be more muted now that oil prices are at lower levels.

OPEC and IEA are underestimating demand growth from China.

Our view differs from theirs because we believe Chinese oil demand growth will be driven mainly by vehicle usage trends, as opposed to industrial activity or economic growth.

Personal mobility (both in terms of domestic driving and international travel) continues to be something increasingly sought after, and this means the average Chinese person is starting to use more gasoline and kerosene.

With this in mind, we believe that oil will bounce in 2019. We are forecasting that oil prices recover over the next six to nine months as the full extent of the destocking is felt mid-year.

Based on our estimates, we still see incentive pricing for oil at around $75 a barrel for Brent, and we still do not expect to see a pick-up in offshore sanctions until these prices are sustained.

Mark Lacey, is head of commodities at global asset manager Schroders

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January 26 2020