The Oil Price Trajectory For 2019

The Oil Price Trajectory For 2019

After last year’s oil price volatility, predicting the likely trends for this year would seem like a fool’s game, but, um, well something about the show must go on. The most recent forecast releases have suggested that, like 2018, the year could see a market that is balanced on average, but will be tighter early in the year and weaker later. It’s rather like the joke about two people at the ocean, one on the shore, the other in ten feet of water, but on average they’re fine.

As the figure below shows, the IEA expects that the market balance will be tighter in the first half of the year, especially the second quarter, than in the second half of the year, although only marginally. (The non-OPEC market will see a nominal shortage of 0.1 mb/d (or 18 million barrels) in the first half, and the opposite in the second half, a nominal surplus of 0.1 mb/d (18 million barrels). This of course assumes that OPEC production is flat, which is unlikely to be the case.


Quarterly Call on OPEC (mb/d)The author from IEA

Iranian and Venezuelan production are likely to decline, but at different rates. Iranian production should decline more early in the year but flatten out as the year progresses and sanctions reach maximum effect, as well as the Iranians develop work-arounds for sanctions. Venezuelan production will probably flatten out early in the year, but reach as minimum partly due to outside assistance (Russian or Chinese) to restore shut-in wells. Production in Libya and Nigeria will fluctuate, and unpredictably although the period after February elections in Nigeria could see escalating tensions. (It is hard to gauge how much lost production in Nigeria is due to political unrest as opposed to simple theft.)

In an attempt to roughly quantify the impact, here are some possible numbers showing the difference in various OPEC members’ production, which will allow comparison with the expected market balance. The expected weak market in the first quarter of 2019, when the IEA projects a drop of -0.2 mb/d in the demand for OPEC oil will be overwhelmed by a combination of falling Iranian, Nigerian, and Venezuelan production, but especially the planned reduction from the other OPEC members. Instead of building slightly, oil inventories should decline by almost 1 mb/d.

Changes in OPEC Production (mb/d)The author

The second quarter is different, since the OPEC ‘quota’ cuts will already be in effect, although there will likely be smaller reductions from the three ‘disrupted’ producers and the non-OPEC market balance will tighten by 0.5 mb/d. This means that there will continue to be an implied stock draw of 0.7 mb/d. The figure below compares this with recent trends, using the assumption that half of the stock change occurs in the OECD. A drop of 75 million barrels in OECD oil inventories over 6 months is significant but not large, although it implies price stability and perhaps a moderate increase ($5-10 at most).

OECD Inventory ChangeIEA data and author’s estimates


Which brings us to the second half of the year. The health of the global economy is also a major source of uncertainty at the beginning of the year, with concerns about a possible recession or at least slowdown being contradicted by the strength of the U.S. economy. Trump partisans like Larry Kudlow argue that there is no sign of a slowdown, suggesting “…I would encourage people to reconsider their pessimism.”   Unfortunately, he overlooks the fact that recessions are always visible in hindsight, so that the fact that there is none in sight is weak tea, indeed.

China is the elephant in the room of macroeconomic uncertainty, with unreliable or absent data and many warning signals—but a history of warning signals that the government has successfully responded to. At least, we think so.  It is entirely possible that the government has simply pumped money into the economy increasing debt to an unsustainable level. Or not.

And it is true that Brexit, U.S. trade actions, and the U.S. government shutdown have not had the impact that many feared, but again, this could reflect the backward-looking nature of most economic trends and the fact that many of the impacts will be at the lowest level of the economy and percolating upwards.

More important, any slowdown is unlikely to become apparent until late in the first quarter and possibly not until late in the second quarter, meaning the moderating effect of weak demand on oil prices will not occur until after a period of tightness late in the first quarter. But in the second half, if OPEC+ producers increase moderately, Iranian and Venezuelan production bottom out, and the recessions leads to destocking by industry, then the 3rd quarter could see market sentiment shift.


What are the odds that the price will mirror 2018’s pattern of gradual rising then a sharp drop later in the year? Not trivial, but there many other uncertainties—Libyan oil production, Iranian success in evading sanctions, Venezuela’s ability to increase oil field maintenance, the timing of any Chinese economic weakness and/or oil inventory drawdown—will determine the precise pattern that prices take. However, it remains important to recognize that while the market might, on average, be balanced this year, at times it will be high and dry and other times under water.

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