By Osama Rizvi
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.
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