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Osama Rizvi

Osama Rizvi

Osama is a business graduate and a student of international relations. Currently working as freelance journalist, covering commodities and geopolitics.Osama is a regular contributor to a variety…

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The 7 Factors Driving Oil Prices In 2019

Last year, oil prices rallied all the way up to a four year high before plunging more than $30. There were many factors at play during that volatile period, most notably the Iranian sanctions and the resultant promise by OPEC+ to boost production to avoid a supply shortage. Volatility appears to have continued into 2019, with uncertainty rife across a number of key areas in this year’s oil markets.

Demand- OPEC estimates suggest that there will lower oil demand in 2019 due to various factors. In its most recent Monthly Oil report, the cartel revised its demand growth forecast down by 100,000 bpd. Goldman Sachs has also “slashed its oil price forecast” due to concerns regarding oversupply and relatively weaker demand. If these predictions are accurate then falling demand growth will likely impact prices throughout the year.

China’s economic health- It may not be possible to win a trade war, but one party can suffer more than the other. This seems to be the case with China as manufacturing slows and GDP growth forecasts look bleak. The Chinese stock market gained the title of worst-performing stock market of 2018, largely due to the trade war. Recently released inflation data, which measures the Consumer Price Inflation (CPI), was lower than what observers had expected; rising 1.9 percent against an estimated 2.1 percent. Producer inflation also looks worrying for China, rising only 0.9 percent against expectations of 1.6 percent growth. Should the world’s most important consumer see an economic slowdown in 2019, the global economy and oil markets would both be hit hard.

Global Recession and Financial turmoil- We are currently in the longest bull market in history, a fact that may be seen as a cause for worry as we enter 2019. 2018 saw multiple sell-offs in the U.S. stock market driven by fear of a financial crisis, slow growth and the trade war. In 2019 the observers should continue tracking the health of the global economy closely. The U.S. yield curve, a time tested measure of prognosticating a recession, has once again inverted. An inverted yield curve augurs ill for both the global economy and the oil market.

2020 Maritime Regulations- The International Maritime Organization (IMO) announced a new set of rules (in 2016) to be implemented by 2020 to reduce the sulfur content in “all marine fuels” from 3.5 percent to 0.5 percent. There are differing opinions about the readiness and capacity of refineries to implement such reforms. According to one estimate, almost 75 percent of extra capacity needs to be built to implement said rules. Moreover, the cost to do so might not be compensated by the sales. In any case, developments in the 2020 IMO rules will be extremely important to follow, with the potential to drastically transform crude oil demand. Related: An Unlikely New Hotspot For Energy Storage

Trade war- Nothing disturbs the flow of world trade, and hence the demand for different commodities including oil, than a trade war. The effect is, of course, amplified if it is between the world’s largest economies. The trade war is particularly important in the context of oil because the countries make up more than 30 percent of world oil demand. While the recent trade talks between the countries having concluded on a positive note, the official statements from both sides do not give a framework or timeline on a resolution of the issue. From oil demand to the global economy, this trade war is undoubtedly one of the most important factors for oil prices in 2019.

Production cuts- OPEC+ finalized a deal in December to curb output by 1.2 million barrels per day, and the details of that deal are important to take note of. Firstly, the base month on which these production cuts are based in October when the major OPEC and Non-Opec (Russia) producers were pumping at record highs. Secondly, Russia does not seem to be very eager about forming a long term alliance with the Saudis and have stated that they would be content with lower oil prices. Russian energy minister Alexander Novak said just after the December OPEC+ meeting that it might take few months to reach the desired production levels. Keeping an eye on how these cuts pan out in 2019 will be key to understanding the supply side of the oil market.

Iran Waivers: Sanctions on Iran and the waivers given out by Washington will continue to be a key factor in oil markets in 2019.  The renewal of waivers that have already been granted to the major buyers of Iranian crude oil is far from a certainty. Any decision to renew or repeal them will heavily impact oil prices.

While this list is far from exhaustive, it contains the most significant oil price catalysts to watch in 2019. The interplay between these factors is likely to play a large role in influencing the oil market narrative for the year to come.

By Osama Rizvi for Oilprice.com

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  • Mamdouh Salameh on January 24 2019 said:
    Four bullish factors will be pushing prices up in 2019. The first is indications that both the United States and China are wanting an end to the trade war between them. President Trump has at last realized that he can never win a trade war against China and that the war was hurting the US economy far more than China’s since the Chinese economy is bigger and far more integrated in the global trade system than the United States’.

    The second bullish factor is that the OPEC+ production cuts are starting to permeate the global oil market and impact on prices. Saudi Arabia and OPEC are determined to ensure that the cuts will do the trick and reduce the glut in the market. Russia is also determined to stick to the cuts but at its own pace.

    A third factor is that the global oil market fundamentals such as a global economy projected to grow at a healthy 3.5% in 2019, a global demand for oil projected to add 1.4 million barrels a day (mbd) this year over 2018 and China’s insatiable thirst for oil could easily support an oil price surging to $80 a barrel this year.

    The fourth factor is the numerous and very reliable reports of a slowdown in US shale oil production. These reports from the Wall Street Journal (WSJ), International oil service companies such as Schlumberger, Baker Hughes and Haliburton and other authoritative organizations including MIT are all talking about declining well productivity, slowing drilling activity, plunging US rig count, a huge backlog of drilled but uncompleted wells (DUCs), rising drilling costs and also rising breakeven prices and therefore can’t be ignored. The most recent report from Schlumberger says that the slowdown in shale drilling activity is creating uncertain outlook for US shale oil output in 2019.

    Still, there will be one bearish element at play this year. It is the realization by the global oil market that US sanctions have so far failed to cost Iranian crude oil exports the loss of even a single barrel of oil thus discounting the possibility a supply deficit.

    Furthermore, The United States has no alternative but to renew the sanction waivers it granted to eight countries in November last year when they expire in May this year or issue new ones if only for the Trump administration to use them as a fig leaf to mask the fact that their zero exports option is out of reach and that the sanctions are doomed to fail.

    Talk about China’s economy slowing down is based on fickle and unsubstantiated premises. China’s GDP grew in 2018 at a very healthy rate of 6.6% exactly as it was projected at the start of 2018 and is also projected to grow at a similar rate this year.

    China achieved a trade surplus amounting to $327 bn in its trade with the United States in 2018. This is not a sign of a slowing down economy.

    Moreover, China’s oil imports rose in 2018 by more than 24% from 8.43 mbd in 2017 to 10.43 mbd and are projected to hit 11 mbd this year. This again is not a sign of a slowing down economy. Furthermore, China’s economy is now a mature economy so it is not expected to continue growing at a range of 9%-12% as was the case in the 1990s and the first decade of the 21st century. Still, an annualized growth of 6.6% for the world’s largest economy based on purchasing power parity (PPP) is an astounding growth when compared with a 2.5%-3.00% for the United States and 2% for the European Union (EU).

    Finally, the International Maritime Organization’s (IMO) new set of rules will have no impact on the global demand for oil. It only enhances the demand of light oil at the expense of the medium, heavy and extra-heavy crudes.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London

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