Crude oil prices are about to book their biggest rise in three years on the last day of 2019, supported by the combined force of OPEC+ production cuts and the improvement of trade relations between the United States and China.
According to Reuters, Brent crude has added 24 percent since the start of the year, while West Texas Intermediate has done even better, rising by 36 percent cumulatively.
At the time of writing, Brent crude was trading at $66.60 a barrel with WTI at $61.57 a barrel. Both were slightly down from yesterday’s close but still on track to book a positive year overall.
“Prices ended the year with optimism close to 70$ /bbl for Brent and we expect them to stay supported through Q1,” OilX chief executive Florian Thaler told Oilprice. “In March all eyes will remain on OPEC and OPEC+ and whether the action of production adjustment will be extended further. We observe that most of the recent optimism can also be attributed to the US/China trade talks and that will remain a key factor to watch as based on OilX data, China is the single largest growth factor in global oil markets.”
“Oil prices have followed the general de-risking drift into year-end despite a rise in Middle East tensions and last week’s bullish-for-oil-price inventory draws as the broader markets appear to be losing some of that holiday cheer,” Reuters quoted AxiTrader market strategist Stephen Innes as saying. Related: China Grants Export License To Teapot Refiners
Yet not all is rosy. “Oil prices, though largely expected to trade positive, will face headwinds from subdued global growth momentum and robust U.S. shale output levels in the first quarter,” analyst Benjamin Lu from brokerage Phillip Futures told Reuters.
Another headwind could be Russia’s withdrawal from the OPEC+ production cut agreement. As Energy Minister Alexander Novak said Friday, as quoted by Energy Intelligence’s Amena Bakr, Moscow will seek to gradually leave the agreement in 2020.
For now, however, in the last hours of 2019, oil is doing better than it was 12 months ago. This could carry over into the New Year in the absence of any production-related news reports that are likely to make a splash and cause benchmarks to take a dive.
One news story that could send prices higher, however, could be the EIA’s production report for October with actual figures from producers rather than estimates. The report is due out later today and could cause a spike in oil prices if, as some sceptics believe, the figure turns out lower than estimated by the EIA at the time, after reports began emerging that shale oil wells’ actual performance fell short of forecasts.
By Irina Slav for Oilprice.com
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If the de-escalation continues into 2020, we should witness a faster depletion of the glut in the oil market and this will send oil prices surging towards $75 a barrel. Prices will also be supported by China’s roaring crude oil imports.
However, there is always the possibility that President Trump who is known to say one thing today and renege on it the following day could be prevailed upon by neo-conservative within his administration to re-escalate the trade war with China thus exerting adverse impact on oil prices and global oil demand in 2020 as was the case in 2019. After all, the trade war goes far beyond trade. It is about the new world order in the 21st century and who will emerge as the dominant power in the world.
Other factors that could impact on oil prices in 2019 are an acceleration of the slowdown in US shale oil production, potential threats to the Saudi oil industry, and a new nuclear deal with Iran.
US shale oil industry is facing a steep oil rig count decline, confirmed production slowdown, declining well productivity and investments, bankruptcies and eventual demise. 2019 was the year in which the hype around US shale oil production finally burst. And despite hype by the US Energy Information Administration (EIA), US production is over-stated by at least 2 million barrels a day (mbd). This means that US oil production will average 10.8 mbd this year and not 12.8 mbd as the EIA is claiming and is projected to average around 10 mbd or less in 2020 and will continue to decline until its demise in 5-10 years from now.
Another factor is that the Saudi oil industry has become hostage of Iran’s allies, the Houthis. If the Saudi-led war in Yemen continues in 2020, retaliatory attacks by the Houthis might resume targeting the most sensitive oil installations particularly the Ras Tannura crude oil loading terminal, the world’s largest. A successful attack on Ras Tannura could cripple Saudi oil exports possibly depriving global oil supplies of an estimated 7 mbd.
A third important factor is that there are now indications that President Trump could be inching towards a new nuclear deal with Iran. A moment of monumental importance for US-Iran relations took place a month ago when a high-level exchange of prisoners took place in Switzerland. The exchange of prisoners is being used by the United States as a fig leaf or a face-saving format to start negotiations with Iran. However, Iran will never accept any negotiations without a lifting of US sanctions against it first.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London