Why Oil Prices Rallied 30% This Year

By Tsvetana Paraskova

Refinery

Oil prices gained around 30 percent in the first quarter this year, with both WTI and Brent posting their best quarterly performance in a decade—since the second quarter of 2009.

At the start of the second quarter of 2019, WTI Crude had already topped $60 last week and has been trading above that level in the first week of April, while Brent Crude has been flirting with the $70 mark for days.

At the end of last year, the analysts predicting such a fast rise in oil prices in 2019 were in the minority, after market participants panicked over gloomy forecasts about slowing oil demand growth this year that sent oil tumbling nearly 40 percent in Q4 2018.

A quarter into this year, signs have started to appear that concerns over faltering demand growth may have been overblown.

Demand has been resilient–actually it has been holding more resilient than many pundits had expected at the end of last year. Coupled with a tightening market due to OPEC and allies’ cuts and U.S. sanctions crippling Venezuelan and Iranian oil sales, oil prices may have surprised to the upside many forecasters.

Higher oil prices have naturally led to higher gasoline prices, and forecasts suggest that U.S. drivers should brace for further increases in gas prices as spring comes and motorists drive more. Refinery maintenance season in the U.S. is also weighing on gasoline stocks and prices, AAA said in an update on April 4.

“Until refineries return to normal operations, which will take a few weeks, American motorists should expect pump prices to continue increasing as gasoline demand gains steam,” according to AAA.Related: The World’s Cheapest Natural Gas

Patrick DeHaan, head of petroleum analysis for GasBuddy, said on April 1:

“There’s no fooling motorists, gas prices have continued to surge. For the seventh straight week the national average has continued to rise, unabated, due to seasonal impacts. The run-up this spring has felt worse than prior years, and thus far, the national average is up nearly 50 cents per gallon from our 2019 low.”

“Unfortunately, this a rut we’ll be stuck in yet for at least a few more weeks,” DeHaan noted.

One of the drivers of higher oil prices so far this year has been “very resilient demand,” Michele Della Vigna, head of EMEA natural resources research at Goldman Sachs, told CNBC this week.

“Everybody came into the year with a very negative view and actually demand has been resilient,” della Vigna said.

“Demand remains robust particularly in the emerging markets, which continue to buy a lot of crude,” Goldman’s expert noted.

The current price level works for everybody on the producer front—it helps to manage deficits in some OPEC members to sustainable levels, it is actually very profitable for the industry, and it’s enough for U.S. shale to keep growing, della Vigna told CNBC.

Goldman Sachs doesn’t see Brent Crude prices breaking significantly above $70 or below $60 a barrel in the coming weeks.

But there are events expected in coming weeks and a couple of months that could impact global oil supply and determine the trend in oil (and gasoline) prices into the summer.

Assuming that demand growth holds, as Goldman says it has so far this year, supply is expected to further tighten with the U.S. sanctions on Venezuela and the upcoming review of the U.S. waivers for Iranian oil customers. The Trump Administration is not expected to cut offall Iranian buyers in early May, considering President Trump’s aversion to high gasoline prices and the current Brent price a hair’s breadth away from $70 a barrel.Related: Russia Seeks New Arctic Oil Frontier

OPEC and its Russia-led non-OPEC allies will review their production cut pact in late June, but at that meeting they will have a clearer picture of where supply might be going, because the U.S. will have already decided whether to extend and to whom to extend waivers for Iranian oil purchases.

OPEC leader Saudi Arabia has made it crystal clear that it would do whatever it takes to rebalance the market, with cuts potentially going through the end of 2019, while non-OPEC leader Russia is, as usual, signaling its reluctance over continued cuts.

On the demand side, there is always weakening global economic growth and the U.S.-China trade war lurking in the shadows to spook the oil market again.

The first quarter this year saw a combination of resilient demand and tightening supply pushing oil prices higher. U.S. sanctions policies toward Iran and Venezuela, the state of the global economy, emerging markets growth, trade disputes, OPEC members’ fiscal needs, or a sudden supply disruption, in Libya for example, will all determine—to various degrees—where oil prices will be in coming quarters.

By Tsvetana Paraskova for Oilprice.com

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