Global economy significant factor in determining 2019 oil prices
LONDON: Oil prices this year will be influenced primarily by the health of the global economy, which is why prices have closely tracked equity and bond markets in recent months.
US shale production growth, the policy of OPEC and its allies, United States sanctions on Iran, and the threat of sanctions on Venezuela may all have an impact on the price of a barrel.
But that impact will be secondary and it is more likely to be crude prices that determine what happens with US shale, OPEC policy and US sanctions.
Global economy
Business sentiment is buckling under pressure from the deteriorating relationship between the US and China, as well as tightening financial conditions in the form of higher borrowing costs and falling equity prices.
The global economic expan sion has been losing momentum since the middle of last year, and there are signs the slowdown has worsened in recent months, the risks skewed to the down side.
So oil consumption, especially middle distillates such as diesel, which are closely linked to freight transportation and industrial activity, is likely to grow more slowly in 2019.
Lower crude prices and the introduction of new pollution regulations on shipping fuels will offset some of the implied slowdown, but consumption growth is still set to slacken.
US shale output
US production of crude, lease condensates and gas liquids surged by more than 2 million barrels per day (bpd) in 2018, the largest oneyear increase reported in any single country in the history of the oil industry.
The frenzied shale boom coupled with signs of slowing consumption growth and unex pectedly generous US sanctions waivers on Iran’s oil exports to push the market towards a large surplus in the fourth quarter.
The result has been a sharp drop in prices which has already prompted Opec, and especially its principal member Saudi Arabia, to cut production sharply.
Lower prices are also expected to moderate the growth in US shale production this year and next, albeit after a delay, as the industry completes the large number of new wells started during the 2018 boom.
The US Energy Information Administration forecasts growth in petroleum liquids supply will slow from 2.22 million bpd in 2018 to 1.73 million bpd in 2019 and 1.24 million bpd in 2020.
Opec production
The Organisation of the Petroleum Exporting Countries and its allies have announced plans to cut their combined production by 1.2 million bpd to prevent the oil market from becoming oversupplied.
The group’s early and aggressive production cuts appear to have removed much of the nearterm surplus in the oil market and boosted sentiment.
Hedge funds and other money managers have stopped selling futures and options linked to Brent crude and European gasoil and become small buyers of both since the start of the year.
Higher spot prices and firmer calendar spreads have caused some Opec policymakers to conclude the market rebalancing process is over.
But if the global economy falls into an extended soft patch or even a recession, OPEC and its allies will probably have to make further cuts to prevent a surplus reemerging.
US sanctions
The US has pledged progressively to tighten sanctions on Iran’s oil exports after the White House decided to pull out of the nuclear agreement reached in 2015.
In the first phase of sanctions, the US granted generous waivers to some of Iran’s largest customers in Asia. But the initial waivers were granted for only six months, so they will have to be extended, narrowed or terminated by May.
White House decisions will be conditional on the availability of spare capacity and prices, which in turn makes them dependent on the state of the oil market and the economy.
If the US decides to impose sanctions on Venezuela’s exports, alternative supplies will have to come from Saudi Arabia, the United Arab Emirates, Kuwait and Iraq.
Spare capacity in these countries may not be enough to cover for tough sanctions on both Iran and Venezuela at the same time while leaving enough to absorb further shocks. — Reuters