Outlook for Crude Oil in 2019
2018 was a mixed year for the price of crude oil. After rising to three-year highs, the price reversed in October and continued to make lower lows and higher lows. This trend led the price to reach the lowest levels this year and there are fears that the price could continue to decline. To forecast the trend in the coming year, it is important to first look at the recent trends in the price.
As you recall, four years ago, OPEC members met in Vienna for their annual general meeting. In this meeting, the focus shifted focus to the United States, a country that was increasing production as the country embraced the hydraulic fracturing technology. In this technology, companies mine vertically and upon reaching a certain depth, they divert the wells horizontally and then pump in water and chemicals. At the time, hydraulic fracturing was an expensive process and it was unprofitable for the companies. Therefore, OPEC agreed to flood the market with oil in a bid to reduce the price. Doing this, they expected most American companies to either file for bankruptcy or leave the industry all together.
This turned out to be a mistake because US had low interest rates. This enabled the companies to borrow cheaply and fund R&D to make mining cheaper. This has enabled the US oil companies become profitable even with crude oil price still low. Recent reports from EIA show that the US is now a net exporter of crude oil.
There are a few reasons for the current trends in oil prices. First, when US abandoned the Iran nuclear deal, investors believed that the supply will be constrained. However, when the sanctions kicked-in, United States announced that it had given a number of countries waivers. This was not what investors expected. As a result, the production continued.
Second, when Saudi Arabia killed Jamal Khashoggi, the United States was expected to react. When Trump gave his support to Saudi, the country had to balance between provoking the US president and low oil prices. For this reason, when OPEC met this year, they announced supply cuts that were lower than what the market was expecting.
Third, with the world currently going through a trade war, there are expectations that the demand will slow in the coming year. As the demand slows, and with production increasing, the only way forward for crude oil is down.
Therefore, in the coming year, the price of crude oil will depend on a number of things. First, it will depend on the supply from OPEC, which controls 50% of all oil production. Second, it will depend on the growth of the world economy. In the last meeting between Donald Trump and Xi Jinping, the two leaders agreed to have a truce. Traders will pay close attention to the deal that is made between the two countries. Third, traders will watch closely the reaction from OPEC if prices continue to decline. At a point, Saudi will need higher prices as the country prepares for the Saudi Aramco IPO. With all these factors, there is a likelihood that the price of crude oil will remain at these lows in the first quarter and then move up later in the year.