2018 was a year of surprises for oil. We began with most traders and commentators convinced that $100 crude was a very real risk and ended the year with a 30% market correction as supplies increased and demand concerns metastasized. Perhaps it’s fitting that the most influential person in oil markets this year wasn’t an OPEC leader, hedge funder or Big Oil CEO but someone with a background in Real Estate and Reality Television who puts ketchup on his steak.
The most influential person in oil markets this year was undoubtedly Donald Trump. He pushed markets both lower and higher with his policies and Twitter feed. The three risks he created drove prices for the year and may continue to do so as we begin 2019.
Donald’s first risk was an increasingly hawkish stance towards Iran which looked to rip up the JCPOA and reimpose sanctions driving Iranian exports to 0 bpd. The threat of lost Iranian barrels was a critical driver of oil prices for the first eight months of the year as traders viewed the market as too thinly supplied. Remember that narrative? It seems like a distant memory, but it was only three months ago when nearly every piece of sell side research was mulling “$100 Crude?” Hedge funds piled into oil from the long side as they never have before and created a net long position of more than 1,000,000 contracts of NYMEX WTI and ICE Brent in anticipation. The risk was clear; Donald Trump has been a lifelong Iran hawk and he was going to undo his predecessor’s driving oil into a bullish vortex. He gave his friends in Saudi Arabia a triple win in the form of higher prices, increased market share and isolating their key geopolitical foe and asked only that they help keep prices from getting out of control.
The Saudi/Trump connection brings us to risk two. The Saudis were obviously happy to step in and take Iran’s market share as prices increased due to the lost production and held up their end of the bargain by pushing their production to more than 11m bpd. Meanwhile the Trump White House did not. The Trump administration ultimately granted full waivers to Iran’s eight largest crude buyers which sent crude oil from a soft, oversupplied market into a full-blown bearish tailspin. This event coincided with the MBS’ brutal killing of U.S. journalist Jamal Khashoggi and it was incredible to watch the two parties remain in lock step as public scrutiny of their coziness reached a fever pitch.…