As we begin 2019, the energy markets and the stock markets are experiencing incredible volatility. Both underwent steep declines during the latter part of last year, but both are off to a fast start in the new year.
How might this all play out in 2019?
Below are my predictions for some of the significant energy trends I expect this year. As I often point out, the discussion behind the predictions is more important than the predictions themselves. That's why I provide extensive background and reasoning behind the predictions.
I also provide predictions that are specific and measurable. At year's end, there are specific metrics that will indicate whether a prediction was right or wrong.
Six months ago, when oil prices were pushing above $70/bbl, I was preparing to make a more conservative oil price prediction for 2019. I thought the price rise would slow heading into 2019, but what I didn't foresee was the collapse in prices that took place in the second half of 2018.
That collapse in oil prices makes this prediction a lot easier. The price of West Texas Intermediate (WTI) closed the last day of 2018 at $45.15/bbl, after falling $30/bbl in the last three months of the year. Oil closed $15/bbl lower than it opened the year. Meanwhile, U.S. crude oil inventories are almost exactly where they were a year ago.
The difference is in the perception of where the oil market is going. Market bears foresee electric vehicles taking a larger bite out of oil consumption, and they see continued growth of U.S. oil production contributing to an oversupply of crude oil globally. They are also concerned about an economic slowdown.
OPEC is the wild card here. A big reason oil prices collapsed is that President Trump convinced Saudi Arabia to increase production to make up for oil that would be lost as a result of Iranian sanctions. But at the last minute, the Trump Administration granted generous exemptions to allow countries to continue importing Iranian oil. These exemptions are supposed to be for 180 days, but they suddenly created too much oil in the market.
Saudi Arabia was furious, and they immediately cut oil production. At the next OPEC meeting, the cartel agreed to cut production to balance the market. I expect they will have success with this strategy in 2019, the same way they did the last time they went down this path. OPEC hasn't lost its pricing power yet, as long as they maintain discipline. I expect their previous success will be repeated this year. The U.S. Energy Information Administration projects that WTI will average $54/bbl in 2019. I think that's too conservative.
It's hard to project an average price, because I don't know how long it will be before sentiment shifts. And there are still going to be those who think electric vehicles are soon going to put oil out of business. Those sentiments will impact prices. But I expect that by the end of the year, OPEC's strategy will be working, and you will see oil prices get back to the $70/bbl level.
Except for an OPEC-induced dip in production in 2016, U.S. oil production has risen like a rocket since 2011. None of those years was bigger than 2018, when domestic oil production rose by 1.5 million barrels per day (BPD). In the six of seven years since 2011 when production did increase, it rose by an average of one million BPD. While I do expect U.S. oil production to grow again in 2019, I think the combination of lower oil prices to begin the year and a potential economic slowdown stemming from trade tensions will result in a slowing of production growth for 2019. Related: The Natural Gas Crash Isn't Over
However, average production for all of 2018 was 10.9 million BPD. By the end of the year this level had reached 11.7 million BPD. Thus, it won't take much of a rise to add another average of one million BPD to 2018 levels. I believe this will happen, but I don't believe we will add a million BPD from the year-end level of 11.7 million BPD (as we did in 2018). All we need to do is sustain another 300,000 BPD in 2019 to year-end 2018 levels to average a million BPD over 2018. I can see that happening, but I don't see a repeat of 2018's huge growth.
I typically make a natural gas prediction, but the fundamental picture is mixed. Inventories are still extremely low, which should call for higher prices. But natural gas prices are quite low to start the year. If the inventory picture improves, they will stay low. If not, we will see a lot of volatility. It's a coin flip, so I am going to forego a natural gas price prediction this year.
But here's one where I think the picture is clearer. On New Year's Day, President Trump tweeted:
(Click to enlarge)
President Trump's tweet on gasoline prices.
Gasoline prices have fallen sharply because oil prices have collapsed. President Trump did influence that by conning Saudi Arabia into increasing production and then letting Iran continue to export oil. This prediction is related to my oil price prediction, but I expect that gasoline prices are going to end the year significantly higher than they began the year. Further, December gasoline prices are usually low, because seasonal demand is low (and it's cheaper to produce winter gasoline).
The price of WTI averaged $65.23/bbl in 2018. Given that we are starting the year nearly $20/bbl below that price, I think it's unlikely that the 2019 average will top that. In turn, I don't think the national average 2019 retail gasoline price will top the 2018 average price of $2.81/gallon. But I do think gasoline prices are going to rise well above the year-end price of $2.36/gallon.
On the flip side, U.S. gasoline inventories are currently pretty high, and that will provide headwinds for a while with respect to gasoline prices. They only reached $3.00/gallon during two weeks in 2018, and I think there is a good chance they don't reach that level at all in 2019. It hinges on how quickly oil prices make a move higher.
I think we will see a gasoline price spike this year, albeit it not as high as in previous years. However, we don't normally see year-end gasoline prices rise by at least $0.30/gallon higher than the previous year. It has only happened once since 2010, but I predict it happens again this year.
One issue that hasn't gotten nearly enough attention in my view is the impact of a pending deadline that will impact the fuel markets. On January 1, 2020, the International Maritime Organization (IMO) will require the sulfur content in marine fuel to drop from a maximum of 3.5% down to 0.5%. The result is likely to be a spike in the price of low-sulfur marine fuels, which will likely impact several types of fuel. Prices for low-sulfur crude oils will likely expand their premium over high-sulfur crudes, and diesel will likely get more expensive compared to gasoline.
As I pointed out in a previous article, the U.S. began to phase in ultra-low-sulfur diesel (ULSD) in 2006. In the decade prior to the implementation of ULSD, retail gasoline traded on average at a $0.04/gallon premium to retail diesel. In 2005, the year before the phase-in of ULSD began, diesel traded at an average of $0.09/gallon over the price of gasoline. And in the decade following implementation, diesel averaged $0.23/gallon over the price of gasoline. Related: OPEC's No.2 Boosted Production, Exports Just Before Cuts Began
In 2018, retail diesel prices averaged $3.18/gallon, a $0.37/gallon premium over gasoline. I expect that premium to reach $0.75/gallon in 2019, as suppliers scramble to comply with the new guidelines. However, one wildcard may impact this prediction, and that is that the new rules are postponed to allow more time for compliance. I don't think that's likely, but it is possible.
There are some significant disconnects in the energy markets as we begin the year. Master limited partnerships, for instance, are trading far out of sync with the underlying fundamentals, and as a result I expect them to outperform in 2019.
But the largest disconnect is in the solar sector. Concerns about the impact of trade wars and tariffs have negatively impacted sentiment in the solar sector. This resulted in a significant decline in solar stocks in 2018. The MAC Global Solar Energy Index Total Return Index (SUNIDX) is a diversified exchange-traded fund (ETF) that is traded on the New York Stock Exchange. The index covers all major solar technologies and includes companies from around the world. In 2018, it saw its value decline by nearly 30%.
Meanwhile, China's solar panel exports soared by 66% in the 3rd quarter year-over-year, and numerous countries continued to install record levels of solar power. Costs for solar photovoltaics continue to decline, mitigating part of the tariffs that the Trump Administration imposed in 2018.
I expect that investors will again conclude that the future is very much about solar power, and the long-term growth rates there will continue to be phenomenal despite the negative perceptions of 2018. I predict that solar equities - as represented by the SUNIDX - will rise by at least 20% in 2019.
Conclusions
There you have my 2019 energy predictions. The themes are that U.S. oil production will start to slow, that oil prices will begin to recover because of actions taken by OPEC, that gasoline prices will move higher - but not nearly as quickly as diesel prices - and that solar equities will experience robust returns.
By Robert Rapier
More Top Reads From Oilprice.com:
Comments
Four bullish developments could be at play during 2019. The first is the growing feeling in the global economy that the trade war between the US and China could be coming to an end. At last it dawned on President Trump that he can’t win a trade war against China and therefore it is better for him to cut his losses and end the war.
The second development is that Saudi Arabia needs an oil price far higher than $80 a barrel to balance its budget. That is why Saudi Arabia is determined to ensure that the recently-agreed OPEC+ cuts amounting to 1.2 mbd will do the trick and reduce the glut in the market. The Saudis have signalled to the global oil market that they are prepared to even do far deeper production cuts this year if needed in support of the oil price.
The third development is that Saudi Arabia may never again let itself be pressured by President Trump to increase its production to dampen the rise in oil prices. It has dawned on it that it made a serious mistake in June last year when it succumbed to President Trump pressure and agreed to add jointly with Russia 650,000 barrels a day (b/d) to the market thus widening an already-existing small glut and causing a steep slump in oil prices from the end of November to the end of 2018. Saudi Arabia showed its defiance when it led OPEC along with Russia to agree to the second OPEC+ production cut agreement. Moreover, it signalled to President Trump that it will never do his bidding again.
The fourth development is the reported slowdown in US shale oil production. The latest disclosure by the Wall Street Journal (WSJ) that US shale companies have over-hyped the production potential from thousands of shale wells comes in the footsteps of many authoritative organizations including MIT accusing the US Energy Information Administration (EIA) of overstating US oil production.
The EIA’s claim that US oil production reached 11.7 mbd in 2018 is overstated by at least 3 mbd made up of 2 mbd of liquid gases and 1 mbd of ethanol all of which don’t qualify as crude oil. In fact International Exchanges around the world don’t consider them as substitutes for crude oil. And if the International Exchanges don’t accept them as substitutes, then they are not crude. Therefore, US oil production could have been no more than 8.7 mbd in 2018.
And despite the aforementioned bullish influences, two bearish elements may still be at play in 2019. One is the failure of US sanctions to cost Iran the loss of even one barrel from its oil exports leading the global oil market to realize that there will not be a supply deficit in the market.
Another bearish element is the hiking of the US dollar’s rates by the US Federal Bank thus adversely impacting on the global oil demand. But this has always been part and parcel of US manipulation of oil prices. The US has been manipulating oil prices for quite a while through the EIA’s hyped claims about rising US oil production and significant build-up in US crude and products inventories and alternating the value of the dollar by which global oil has been priced and sold until the petro-yuan came on the scene on the 26th of March 2018.
With the petro-yuan gaining real ground at the expense of the petrodollar, US manipulation of oil prices could be seriously undermined.
Finally, the fact that gasoline prices fell in 2018 has nothing to do with President Trump’s tweets and everything to do with the collapse of oil prices. And since oil prices are projected to surge beyond $80 in 2019, it is logical to expect gasoline prices in the United States to rise too.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London