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Nick Cunningham

Nick Cunningham

Nick Cunningham is an independent journalist, covering oil and gas, energy and environmental policy, and international politics. He is based in Portland, Oregon. 

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Looking Back On A Wild Year For Oil Prices

For the oil market, 2018 has been a roller coaster ride. Ups and downs are always expected, but the twists and turns seen this year were exceptional by any standard.

In January 2018, oil prices had climbed to multi-year highs, with the supply surplus finally ebbing, after several years of a downturn and more than a year of production curbs by the OPEC+ coalition. Inventories were declining rapidly and Venezuela was entering a steep downward spiral that promised even more production losses. Brent topped $70 per barrel and seemed to be heading higher.

But what unfolded in the ensuing months nobody could have predicted. And that was true on many fronts.

The IEA expected the U.S. would add 1.3 million barrels per day (mb/d) in 2018, while the U.S. EIA predicted growth of 1 mb/d. In reality, the U.S. added about 1.5 mb/d in 2018, and preliminary data suggests U.S. production in December 2018 will be 1.6-1.7 mb/d higher than the same month a year earlier.

That surprise pales in comparison to some of the geopolitical developments. The Trump administration launched a trade war with China, and few, if any, experts would have predicted that by the third quarter of 2018 the U.S. would have tariffs on more than $200 billion worth of imports from China.

More directly relevant to the oil market was the U.S. withdrawal from the Iran nuclear deal. At the start of 2018, there were clear warning signs that this might occur, so it was not entirely surprising. But few would have predicted that Iran sanctions would turn out to be one of the dominant narratives for the oil market in 2018. More surprising than the initial sanctions on Iran was the series of waivers issued in November to allow Iran to continue to export oil, a seeming capitulation on the behalf of the Trump administration to high oil prices.

At the start of 2018, OPEC+ was gaining confidence, presiding over a period of strong inventory drawdowns and higher oil prices. By mid-year, the group had grown worried that they may have tightened things too much. With steep losses from Iran expected by November, OPEC+ decided in June to ratchet up output. Related: UBS: Expect $80 Brent Next Year

That resulted in another one of the year’s big surprises: the run up in prices in September and October, and the crash that unfolded beginning in November. OPEC+ closes out the year in a worse situation than at the beginning of 2018 – oil prices in freefall, surging U.S. supply, and the group once again trying to get a handle on an oversupplied market.

Another major surprise this year was the end of “global synchronized growth,” the return of financial volatility, and the looming danger of a broad economic slowdown. At the start of the year, global stocks were booming and U.S. GDP looked as strong as it had at any point in the last few years.

That brings us to the start of 2019. There are no fewer sources of uncertainty next year than there was this year. Analysts are arguably a bit humbler regarding U.S. shale, with forecasts on the pace of growth running the gamut. Most forecasters acknowledge that growth could surpass expectations yet again. The ironic thing is that 2019 might actually see a shale slowdown, now that WTI has crashed below $50 per barrel.

OPEC+ has its work cut out for it in 2019. The supply cuts of 1.2 million barrels per day, from today’s vantage point, have not been accepted by traders as a sufficient response to the market’s current predicament.

Iran sanctions are in place, but the waivers expire in May. It would be imprudent to try to predict what the Trump administration might do on this issue, but the prospect of steeper supply losses loom.

Related: Canada’s LNG Dream Just Turned Into A Nightmare

The largest source of uncertainty comes from the cracks in the global economy. Tightening interest rates, volatility in both stocks and bonds, currency fluctuations and slow growth could spell trouble for oil. The U.S.-China trade war – now ostensibly on pause – could reignite as soon as March.

The outlook at the beginning of 2019 is set to look dramatically different than it did a year earlier. Oil prices are low and demonstrating extraordinary weakness. A year earlier the market was gaining strength for the first time in years. The global economy is currently souring instead of gaining strength. OPEC+ is looking to expand its supply reductions, not planning on how to unwind them. Meanwhile, U.S. shale could (just maybe) begin to slow to more pedestrian growth levels. A year ago the shale machine was accelerating.

No doubt many of the forecasts being formulated today will be proved wrong, perhaps wildly off base, by the end of 2019. Then again, that’s perhaps the one assumption we can be sure of.

By Nick Cunningham of Oilprice.com

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  • Neil Dusseault on December 26 2018 said:
    While the folks at OilPrice.com and beyond write about fundamentals and technical analysis, there is an actual force determining the price of oil: Algos (algorithmic trading on behalf of hedge fund managers accounts for approx. 83-84% of all trades). Wake up everyone!

    If you are an "oil bull" or involved in the oil sector one way or another, these hedge fund managers will short the market in little to no time bringing oil businesses to bankruptcy and producers to their knees. If you are a consumer or an "oil bear" these same hedge funds will trade prices up $30/bbl in a single year, thereby doubling the cost of everything...they don't care what the price is because they're already very rich and exact price is irrelevant to them as they are inept to most of the world--they just crave volatility (price movement).

    It's time to legislate against algorithmic trading and hedge funds altogether: They have never done anything positive for the global economy, only to enrich their own portfolios. Take Wednesday for example: By 10 a.m. front-month contracts of WTI had over 400k contracts traded...and say goodbye to $42/bbl, $43, $44, $45, or even $46. Really? Prices needed to come up more than 10% or over $4/bbl based on what? Have we entered WWIII? Are we down to the last drop of oil? This is why I never have nor never will care about any significant drop in the price of oil, because WTI--unlike any other commodity in the futures market--is as easily and blatantly obviously manipulated in favor of oil bulls and producers: What takes weeks perhaps even months to decline takes just days to all come right back up.

    Also, consider RBOB: It's minimum market fluctuation (tick size) is $0.0001/gallon, yet it was up about $0.10/gal! An analogy I like to make in these events is it's like a group of over-privileged folks sitting down to eat at a restaurant that most people cannot afford to eat at, yet the food was grown and prepared by everyday folks. The wealthy diners absolutely gorge themselves then one by one get up and not only leave the place for someone else to clean up after, but then everyone else in the world is expected to pick up their tab...and they do this EVERY. SINGLE. DAY.

    The solution? Outlaw algorithmic trading (make it illegal) leaving the market to more fair trading by non-eccentric speculators. As for the hedge fund managers, boycott them! That's right: Despite having all this money, don't sell them anything, don't build anything for them--let them have the money but with no way to spend it they will quickly realize they have lost the game of capitalism.

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