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Analysts at TD Securities suggest that with several pipelines coming online in the US in H2 2019, the market has begun to price the possibility that the shale patch will drown the world in oil.

Key Quotes

“While we have taken note of the deterioration in demand growth, we think that downside momentum in demand expectations has troughed, suggesting that expectations are set to firm in 2019. And, as refineries are coming back online in short-order, the recent crude builds should begin to unwind into Q1 2019, until increased pipeline capacity sees production growth accelerate later in the year. But just after one set of bottlenecks is unplugged, another one will be forming on the export capacity side, which will keep the marginal US barrel landlocked in North America. At a time when light oil will be high in demand as IMO regulations approach, it will be stuck in continental US.”

“As such, this should see Brent strengthen further relative to the WTI benchmark. Expected OPEC+ supply growth reversal starting in December and declines in Iranian shipments later in the year should also serve as an important development contributing to the widening of the Brent-WTI differential in 2019. Our models suggest that Brent prices should average $80/bbl in 2019, while WTI looks set to average $67/bbl.”

“Considering the momentum shock in crude markets, which prompted WTI crude to break a multi-decade record for consecutive declines, we expect that a catalyst may be needed for prices to catch up to fundamentals in the near-term. And, considering the cost of carry associated with the recent re-emergence of a contango curve structure, we think taking flat price-risk may not be the best way to express our view.”

“Rather, we hold strong conviction that current prices for Dec19 WTI-Brent at $-8.8/bbl provides an attractive opportunity to play our view on relative global supply/demand dynamics, with a potential for a significant widening below $-15/bbl.”