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Oil Market Report: Markets remaining calm

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The theme we identified in last month’s Report of “mixed signals” is appropriate again this month, with geopolitics and industry disruptions confusing the supply outlook, and the first change to our 2019 demand outlook for several months. The ongoing geopolitical supply concerns around Libya, Iran, and Venezuela have been joined in the past few days by the attacks on shipping off Fujairah and on two pumping stations in Saudi Arabia. At the time of writing, there is no disruption to oil supplies and prices are little changed. The IEA is monitoring the situation, particularly in view of the proximity of Fujairah to the strategically vital Strait of Hormuz. We are also monitoring the impact of the contamination of Russian crude oil passing through the 1.4 mb/d Druzhba pipeline system. The issue will be resolved in due course, eased by commercial and government stock draws by Russia’s customers. One consequence could be a loss of confidence in the quality of the crude flows and thus a search, where feasible, for alternative supplies that could intensify price pressures for heavy/medium sour crude oil.

Despite the difficult geopolitical backdrop and other supply problems, headline oil prices are little changed from a month ago at just above $70/bbl for Brent. In the intervening period, the decision by the United States to cease the waiver programme for buyers of Iran’s crude oil did see Brent briefly reach $75/bbl. However, there have been clear and, in the IEA’s view, very welcome signals from other producers that they will step in to replace Iran’s barrels, albeit gradually in response to requests from customers. There is certainly scope for other producers to step up production with our data showing that in April parties to the Vienna Agreement collectively produced 440 kb/d less than they promised, with Saudi Arabia producing 500 kb/d below its allocation. Of course, as we wrote in the February edition of this Report, there are quality issues for refiners used to processing Iranian barrels and the fact that increases in output come at the cost of reducing the global spare capacity cushion.

In this Report, there is a modest offset to supply worries from the demand side. Our headline growth estimate for 2019 has changed little since the middle of last year, but this month we cut it by 90 kb/d to a still healthy 1.3 mb/d. The reduction is mainly concentrated in 1Q19 on weaker than expected data for Brazil, China, Japan, Korea, Nigeria, and elsewhere lowering growth by 410 kb/d versus our last Report. Even so, slower demand growth is likely to be short-lived, as we believe that the pace will pick up during the rest of the year. An important implication of our revised demand data is that in 1Q19 the oil market saw an implied surplus of supply over demand of 0.7 mb/d, which was higher than previously suggested. As we move through 2Q19, while there is considerable uncertainty on the supply side, it is highly likely that the implied balance will flip into an indicative deficit of about the same size. Stocks in the OECD at the start of April have fallen back to the level seen in July in terms of days of forward cover and other stock indicators are pointing in the same direction.

For now, despite all the supply uncertainty, headline Brent oil prices are little changed from a month ago. However, the backwardation has steepened considerably and front month prices are about $3/bbl higher than for six months out. The decline of 230 kb/d in the North Sea loading programme for June versus May, although not a surprise, is another important factor adding to overall concerns about supply. Elsewhere, contract prices are rising sharply with Asian customers paying significantly more for barrels from Middle East sources as they seek to replace their normal supplies of Iranian crude. Basrah Light, for example, was reported as offered at its highest level for nearly eight years.

The IEA is reassured to see that the challenges posed by the supply uncertainties are being managed and we hope that major players will continue to work to ensure market stability.

IEA

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Private markets forecast to grow to $4.9tn globally by 2025 and make up 10% of global AuM

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Assets under management (AuM) in private markets to expand by between $4.2 trillion and $5.5 trillion in the years up to 2025 in worst/best case scenarios for economic recovery, according to new analysis from PwC.

The report, Prime time for private markets: The new value creation playbook, examines prospects for four primarily illiquid asset classes of private equity (including venture capital), infrastructure, real estate and private credit across a range of scenarios for 2019-2025. 

The report projects significant growth for the value of private markets of $5.5tn (best case), $4.9tn (base case) and $4.2tn (worst case) depending on how global economic conditions respond to the disruption caused by Covid-19.

Will Jackson-Moore, global leader for private equity, real assets and sovereign funds at PwC says,‘The report highlights the continued emergence of private markets as a fast growing and highly impactful portion of global capital markets. Investors continue to look to the sector to deliver the yields that lower risk and more liquid asset classes struggle to match. 

‘Yet this is also an opportunity for private markets to take a lead on ESG and net zero commitments and demonstrate the impact they can make in public perception beyond public markets.’

Opportunities across asset classes

Even in the worst case scenario of a prolonged recession, the projections look ahead to growth of almost 50%  up to 2025.

While private equity is very much “the asset class of the moment” there is evidence that there are significant opportunities for growth and returns in areas such as real estate, infrastructure and private credit.

Will Jackson-Moore says,‘While opportunities for growth are out there, it is important to emphasise that returns will be harder to find and be more aggressively fought for. Managers will need to be innovative in their approach to value creation and respond swiftly to changing investors and governmental expectations as economies recover from the effects of the crisis.’

ESG and going beyond financial return

Will Jackson-Moore says,‘Our research highlights the extent to which financial return is no longer the sole driver of private markets growth. ESG and Net Zero commitments now represent a significant source of value preservation and creation. 

‘Private market managers need to respond by looking at how to apply an ESG lens to investment strategy and product development. Whether it is in impact turnaround initiatives in which ‘dirty’ production facilities are turned green, or building strong commitment to diversity and inclusion at your organisation, these matters are no longer an overlay.’

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Key Reforms Needed to Grow Albania’s E-commerce Sector

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A new World Bank Albania E-Commerce Diagnostic highlights key reforms needed to better leverage digital trade as opportunity for economic development.

E-commerce can be an important asset for Albania. Online sales channels allow businesses to reach more customers, at home and abroad. Customers gain from greater convenience and more choice. Sectors enabling e-commerce can create new jobs, including in technology companies, logistics and online payments.

During the COVID-19 pandemic, online markets are playing a particularly important role by allowing economic life to continue despite social distancing. The 2020 World Bank Enterprise Survey reveals that almost 20 percent of Albanian firms surveyed reported having either started or increased online business activity during the crisis.

To help Albania seize the digital trade opportunity, this new diagnostic identifies a roadmap of critical reforms in logistics and customs;  digital connectivity; online payments; private sector capabilities and skills; and the e-commerce regulatory framework.

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Digitalizing the Maritime Sector Set To Boost the Competitiveness of Global Trade

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A new report launched today by the World Bank and the International Association of Ports and Harbors (IAPH) shows that better digital collaboration between private and public entities across the maritime supply chain will result in significant efficiency gains, safer and more resilient supply chains, and lower emissions.

Maritime transport carries over 90% of global merchandise trade, totaling some 11 billion tons of cargo per year. Digitalizing the sector would bring wide-ranging economic benefits and contribute to a stronger, more sustainable recovery.

Accelerating Digitalization: Critical Actions to Strengthen the Resilience of the Maritime Supply Chain describes how collaborative use of digital technology can help streamline all aspects of maritime transport, from cross-border processes and documentation to communications between ship and shore, with a special focus on ports.

The COVID-19 crisis has evidenced a key benefit of digitizing waterborne and landside operations: meeting the urgent needs to minimize human interaction and enhance the resilience of supply chains against future crises.

“In many of our client countries, inefficiencies in the maritime sector result in delays and higher logistics costs, with an adverse impact on the entire economy. Digitization gives us a unique chance to address this issue,” noted Makhtar Diop, World Bank Vice President for Infrastructure. “Beyond immediate benefits to the maritime sector, digitalization will help countries participate more fully in the global economy, and will lead to better development outcomes.”

IAPH Managing Director of Policy and Strategy, Dr Patrick Verhoeven, added: “the report’s short and medium term measures to accelerate digitalization have the proven potential to improve supply chain resilience and efficiency whilst addressing potential risks related to cybersecurity. However, necessary policy reform is also vital. Digitalization is not just a matter of technology but, more importantly, of change management, data collaboration, and political commitment.”

Although the International Maritime Organization (IMO) has made it mandatory for all its member countries to exchange key data electronically (the FAL convention), a recent IAPH survey reveals that only a third of over 100 responding ports comply with that requirement. The main barriers to digitalize cited by the ports were the legal framework in their countries or regions and persuading the multiple private-public stakeholders to collaborate, not the technology.

The report analyzes numerous technologies applied already by some from the world’s leading port and maritime communities, including big data, the internet of things (IoT), fifth-generation technology (5G), blockchain solutions, wearable devices, unmanned aircraft systems, and other smart technology-based methods to improve performance and economic competitiveness.

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