Volatility in the oil market is here to stay with no end in sight. There are many characteristics and aspects that can impact forecasting as we head into 2019.
Factors impacting 2019
U.S Shale keeps growing: plan on the U.S. shale production to continue its growth. The recent downturn in prices, number of industry names highly leveraged and ongoing pipeline expansion issues could slow growth, but not by much. Production could decline or flatten if prices fall and stay below $45 WTI providing tightening of any future production.
Iran: The U.S. provided waivers to eight countries buying Iranian oil which will expire in May 2019. A portion of the current pricing in the oil market included the expectation the US sanctions on Iranian oil would have had more impact due to the administrations tough talk. The issuance of waivers, after spending most of the year boasting how serious it was about taking Iranian oil to zero, caused a major disruption in oil futures and market stockpiles. The industries hope is the Trump administration would not want to repeat that scenario, and with a supply surplus the U.S. government has more leeway to take a harder line on the Iranian sanctions and reduce the number and size of waivers.
OPEC + Russia: The 1.2 mb/d cut recently agreed on by Saudi Arabia and Russia should help eliminate much of the surplus by the mid-year. Russia is currently increasing its current levels of production until the cuts go into effect (Jan 2019). Russia’s compliance with the OPEC cuts will be critical in insuring oil prices do not go lower.
Seasonal Demand: Current demand is at its seasonal lows, by mid-March 2019 we should start seeing the increase in overall demand. Normal market factors and data reflect the increase will impact pricing and supply requirements.
Economic downturn: Perhaps the largest pricing risk is the possibility of an economic downturn. The global economy is slowing, including China. The US has stayed above the fray, but with globalization there is no way, if the downturn continues, that the US will not be dragged down into a slowing economy and possible recession. The tightening interest rate is looming large over many of these complications. The U.S.-China trade war could still drag down the global economy, and financial indicators are already reflecting slowing in every category of the market. This is a negative economic outlook, at least for the first two quarters of 2019, and could impact oil pricing.
Other factors: Production and supply concerns with Libya and Venezuela, and potential global conflicts may impact overall supply but not enough to cause a much-needed price surge.
The noted factors and their specific impact are crucial to the rise and fall of oil prices. The critical factor that may provide a rapid price increase is the Trump administration getting tougher on the Iranian oil sanctions May 2019. Even if all those factors come into play, we will probably see WTI pricing bounce around the $50 to $60 a barrel range. If prices fall into that range it will support US oil shale growth around 1 million bpd, if the price falls below we could see a major reduction in US shale expansion and potential impact on the smaller over leveraged companies. The number of economic and political risks could rise or slump oil prices very quickly. Target dates that impact potential price increases or reductions begin in March and continue through May 2019.
March – Global and US outlook / economic reports. US Fed potential rate hike.
March - China and US trade negotiations expected completion.
March to April looking for an increase in oil consumption (demand increase).
April – OPEC cuts end and look at any future cuts.
May- Trump administration re-looks Iranian oil sanctions.
Good luck and Buckle up for a bumpy ride!
Written by Steve Williams, Mineral Sales Group LLC, 27 December 2018