FrontierView recently launched The Lens, a weekly newsletter published by our Global Economics and Scenarios team to highlight developments and trends that will have the highest impact on business executives. Below is an excerpt from this week’s edition, “Oil price for 2019 revised up, but expect a Q4 price collapse” and “US manufacturing slows more than expected.”
Oil price for 2019 revised up, but expect a Q4 price collapse
- FrontierView has revised up its oil price annual average forecasts to $68 Brent (from $62), and to $62 WTI (from $55).
- Prices have increased faster than expected in early 2019, despite rising US inventories and signs of Chinese stockpiling. This is the highest level since September 2017, and above the 5-year average.
- The recent US announcement that it will no longer extend waivers for Iranian oil, combined with ongoing developments in Venezuela, complicates the oil supply picture in the near-term and has contributed to higher prices.
- US oil output continues to expand, with total output expected to grow by another 1.4 million bp/d in 2019. If existing supply stabilizes, US growth alone is more than enough to fully meet expected demand growth in 2019.
We expect similar price action as in 2018, where high oil prices collapsed in Q4 after peak demand season ended. Constant supply additions from US production drives this seasonality, mainly shale, and expected to continue to increase incrementally. This will lead to inventory builds and falling prices in Q4. Key assumptions that could disrupt our oil price view are on the supply side. We expect Saudi Arabia to follow-through with its commitment to increase output to mitigate the impact of lower Iranian exports. This should result in higher Saudi crude production and exports in May.
This is not a major upward revision and our fundamental view on the oil market is unchanged. Slightly higher average annual prices will support oil exporters, but we do not expect much pass-through benefit to consumers. This will be particularly obvious as most oil exporters continue to implement structural reforms. Conversely, this is a slight negative for large oil importers, especially India and China. Both countries have already seen growth forecasts slip somewhat in recent months.
– Ryan Connelly, Senior Analyst for Global Economics and Scenarios
FrontierView clients: See our Global Leadership Briefing for further insights
US manufacturing slows more than expected
- As measured by the Institute of Supply Management (ISM), manufacturing activity in the US slowed more than expected in April.
- The ISM purchasing managers index (PMI) slowed to 52.8, from 55.3 in March. This was well below the survey median expectation of 54.9.
- The US ISM PMI peaked over 60 in August 2018, but has fallen consistently since that time.
- Though US manufacturing continues to expand, the rate of expansion is slowing, with a rising number of supply managers reporting slowing new orders, rising inventories, and falling prices.
The US is not immune to the global manufacturing slowdown that we see more clearly in Europe and China. Export orders have slipped in recent months, partly due to falling demand and partly due to the ongoing trade wars that reduce US export competitiveness. But overall, US manufacturing has a relatively low dependence on international trade, as most US manufacturing goes into US domestic consumption. Manufacturing activity is slowing mainly due to slowing US consumer demand. We expect consumer spending growth in 2019 to slow to 2.1%, from 2.6% last year, driven by slowing employment growth in the later part of the year.
Firms need to revisit demand forecasts for the US in order to minimize inventory builds, as US consumer demand growth slows across product categories from the rapid growth rates seen in 2018. This is especially true for consumer durables, where US consumers already made any deferred purchases in 2017-2018 and are only purchasing new products in 2019 based on replacement lifecycles.
-Ryan Connelly, Senior Analyst for Global Economics and Scenarios
FrontierView clients: See our upcoming North America Monthly Market Monitor update for further insights