2018 has left and the world waits for what the New Year has to offer particularly in the oil market. The rollercoaster in the oil market is expected to continue into the New Year. West Texas Intermediate (WTI) crude prices rose by almost 30% between January and October, from $60/bbl to $78/bbl, subsequently crashing to multi-year lows in December.
The major question going into the New Year is whether the fundamentals behind these price trends will shift significantly over the next 12 months. In other words, should more of the same be expected in 2019?
Factors that could affect oil prices in 2019
There is currently a crude supply glut, due to producers led by The United States, Russia, and Saudi Arabia pumping about 1.5 million barrels more than consumers need at current prices. The United States is currently the largest producer of crude oil, surpassing the likes of Russia and Saudi Arabia. Therefore, the role of America’s energy resurgence in the state of today’s markets cannot be overemphasized particularly with advances in exploration and production (E&P) technology.
On the other hand, OPEC+, the reimagined OPEC super-cartel that supplies about 55% of global oil production has been faced with challenges in meeting its responsibilities as the ‘market-stabilizer.’ This has been substantiated with Saudi Arabia not being able to implement a cut to keep the prices of oil at around $70/barrel. Unfortunately, troubles in major oil producing countries like Venezuela and Qatar have further undermined the price-setting ability of the cartel.
Interest rate hikes from the U.S. Federal Reserve have also accelerated the drop in oil prices. This is due to the fact that higher rates make the dollar more expensive, consequently hurts international demand for crude as oil is priced in dollars. Higher rates could also lead to slow economic activities with borrowing becoming more expensive and debt becoming costlier to service.
The possibility of a global recession could also lead to a continued current downward trajectory. Growth in the OECD is projected to shrink 0.1% next year, whereas the world as a whole should see a 0.2% drop through 2019 from 3.7% to 3.5%, further exacerbating the fears of global economic recession.
Geopolitical turmoil looks to be the major factor that could positively influence the prices of oil. President Trump intends to withdraw all 2,000 U.S. troops from Syria and 7,000 from Afghanistan, which will have serious implications for security and stability in the region, resulting in increased assertiveness from trouble-makers in the region. All things being equal, this will lead to the prices of oil skyrocketing, particularly if Iran eventually follows through with its threats of blockading the critical Strait of Hormuz.
All in all, 2019 oil markets will not be significantly different from those of 2018 – volatile, cyclical, and unpredictable.
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