- Jan 12, 2019
It was a sunrise 12 days ago, with a new year. We take a global peek of what this year may have in store for oil. As forecasted by the International Energy Agency, IEA in its Oil Market Report, global demand is projected to increase to 100.8 million barrels per day this year from a daily average of 99.3 million barrels per day in 2018. But another belief is that global oil supply will outpace demand throughout 2019.
It is complicated that there are potentials for higher price and market stability in global oil with many incongruent parameters for 2019. Based on conventional forces of demand and supply, the equilibrium point may give marginal price increases if demand exceeds supply.
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But Geopolitics, government interventions, instability in producer countries and global health of economies including, the United States, China and India all affects global energy demand and supply.
With a projected sluggish growth in the global economy for 2019, a result of the trade dispute between the U.S. and China, there are fears that a lower global economy could hurt energy demand. External demand remained subdued due to the trade frictions between China and the U.S., as domestic demand weakened. U.S. manufacturing data from December points to a slowdown as manufacturing activity in China also contracted in December; the first time in nearly two years.
A macroeconomic analyst believes that the Chinese economy may come under greater pressure in 2019. The U.S.-China trade war is showing some signs of temporary truce that ends in March 2019. Presidents Trump and Xi discussing the trade disputes in a telephone conversation a few days ago could cushion a potential economic meltdown.
The shale oil boom has given the United States a boost in crude production to an all-time high of 11.5 million barrels per day, which is shaking up the geopolitical balance, putting them on par with Russia and Saudi Arabia in the Big Three League.
This growth in crude production is contributing to worries about a growing global glut. Last year, the United States became a net oil exporter for the first time in 75 years. According to Bloomberg and data from the American Petroleum Institute, the United States had been a net oil importer since 1949.
The United States is now the world’s biggest crude oil producer and also the world’s biggest oil consumer. Issues of a significant export capacity from the United States, residual exports from Iran as well as the potential for production growth out of Iraq and Libya on the market later this year should all be on the cards for leading oil producers and dependent nations.
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The re-imposition of US sanctions on Iran’s oil exports is risk on oil prices in 2019. Concerns about oversupply are outweighing fears about the sanctions, dampening prices. How much prices will rise again depends on whether President Donald Trump can prevent Iran from selling oil to buyers in Europe and Asia.
The risk is that lower Iranian supply would expose oil markets to severe supply disruptions. A decline in Iran’s oil output will keep prices slightly high, with Brent blend expected to average US$75.5 per barrel in 2019, up from an estimated US$73.2 per barrel in 2018. The IEA says the cooperation between Russia and Saudi Arabia is now the basis of production management with these two countries having a large capacity to swing output one way or the other. For them, prices falling further would place their budgets under great stress.
Is it too early to predict Russia and Saudi Arabia as it relates to crude oil output and pricing? At the meeting in December, OPEC led by Saudi Arabia and non-OPEC members, led by Russia, agreed to cut 1.2 million barrels a day from October levels, with the reduction to begin at the start of the New Year. Russia and Saudi Arabia may be on the same page in terms of increasing production to outwit the US shale producers but Russia may not act the same way in taking quantity offline because they want a price ceiling below US$80.
As the major oil producers in the OPEC+, increased production to mitigate the effect of U.S. sanctions on Iran in November 2018, the Trump administration granted waivers to eight nations to continue the import of Iranian oil. The 180-day waiver to eight countries that buy Iranian oil including China, India, Greece, Italy, Taiwan, Japan, Turkey and South Korea was on the understanding that they would reduce their intake of Iranian oil over that period.
Trump’s administration intends to punish any buyer of Iranian oil unless they are given a formal waiver. Penalties include preventing the buyer from operating in the US market, trading in US dollars or accessing the US financial system.
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Buyers of Iranian oil will also find it difficult to get their purchases insured. The European Union sanctioned Iran on Tuesday over allegations that the country’s intelligence service orchestrated a series of assassination plots in Europe in recent years, including the killing of two Dutchmen of Iranian origin in the Netherlands, with ties to anti-government extremist groups.