Politics, U.S. Shale Drove 2018 Oil Prices; That Won't Change In Early 2019
Ellen R. Wald, Ph.D | Dec 27, 2018 05:30AM ET
Without doubt, the biggest story for oil during 2018 was its price volatility. The commodity is nearly 30% lower now than where it was last year.
WTI started 2018 trading at close to $60 per barrel; it's now hovering in the $44-$47 per barrel range. Brent began the year at $66.65 and closed on Wednesday at nearly $54 dollars per barrel.
During the first four months of 2018, oil markets were volatile but the commodity still climbed steadily higher. This was helped by the OPEC and non-OPEC cooperative agreement to reduce oil production.
With several outside organizations (among them S&P Global Platts, whose production numbers are often quoted in these columns) and regular meetings of OPEC's Joint Ministerial Monitoring Committee (JMMC) it was determined that most countries did indeed adhere to their production allocations. Still, Iraq and Kazakhstan were notable consistent overproducers.
A second factor driving prices higher during this period: several major producing countries experienced involuntary declines in output. In particular, former powerhouse producer Venezuela, whose production dipped to 1.41 million barrels per day in April, and Angola, which produced only 1.53 million barrels per day during the same period. Production in Libya and Gabon also declined at the same time.
h3 Surprise Headwinds Pressure Prices/h3The next eight months of 2018, however, made the early part of the year look relaxed, even calm. A series of unexpected headwinds combined to ultimately pressure prices lower.
At the beginning of May, the Trump administration announced it would issue new sanctions against the Iranian oil industry, to take effect in early November. The decision itself wasn't especially surprising, but the market reaction was telling. Although WTI hit $72 per barrel in mid-May, by June those gains were erased.
The real impact of the Trump administration’s new sanctions policy became apparent from June, through July and August. Initially, analysts assumed the Trump administration would simply reinstate the Obama-era sanctions on Iran’s oil industry and implement them the same way.
Get The News You Want
Those sanctions included significant exemptions for Asian importers of Iranian oil that reduced their purchases of Iranian crude. At the time, these countries were also allowed to import as much condensate as they wanted, as long as their crude oil purchases declined.
However, the Trump administration came out with strong expected that purchasers of Iranian oil would cut their imports to zero by the November 5 implementation date.
As well, the U.S. shale industry helped drive the volatility. At the OPEC International Seminar, held on June 20, Scott Sheffield, the CEO of Pioneer Natural Resources (NYSE:PXD) within the next 3 or 4 months producers would be forced to shut wells.
As a result, from June 20 to July 5, oil prices climbed to numbers that even raised concern among politicians. The price of gasoline jumped, just in time to hit consumers during the height of the summer travel season in the U.S.
WTI gained $10, rising to $74 per barrel, initiating a public and private pressure from President Trump aimed at OPEC, and particularly Saudi Arabia, to increase oil production so that when the U.S. sanctions on Iran went into effect, oil prices wouldn't spike into the triple digits. OPEC had already indicated that due to the involuntary production cuts some producers were suffering.
The cartel and associates announced they would no longer adhere to individual quotas. Instead, the group was determined that producers with spare capacity could overproduce their quotas to compensate for declines elsewhere.
Nonetheless, by mid-September analysts were the EIA during the month that the U.S. had likely surpassed Saudi Arabia and Russia as the world’s largest oil producer, prices continued to climb.
WTI hit a record high of almost $77 per barrel in early October. Throughout the month, Saudi Arabia reaching a high of 11.02M barrels per day (according to Platts).
The effort paid off. Oil prices declined throughout October as more oil from Saudi Arabia, Russia and the UAE hit the market and it became clear that the feared infrastructure crunch in the Permian was not nearly as bad as had been forecast. Shale producers took advantage of higher prices, moved rigs to areas with more pipelines and used other means to transport their oil out of the Permian instead of curbing production.
The decision by EPIC Midstream Holdings to convert the EPIC pipeline to carry crude oil use also helped alleviate the infrastructure crunch, keeping production growth strong.
But at the beginning of November, the Trump administration surprised markets, by announcing it would not, in fact, require importers of Iranian oil to cut their purchases to zero by November 5. Rather, it would be issuing exemptions to certain regional importers.
Though the amount of Iranian oil that could legally remain on the market exemptions were significant . Prices dropped.
The freefall continued throughout November and December. Indeed, during the past month markets saw several days with slides of as much as 6% or 8% in a single day. OPE, during a meeting in early December , predictably decided to cut production by 1.2 million barrels per day.
Markets, however weren't satisfied, considering the reduction not nearly enough. U.S. oil output continues to grow even as demand growth is expected to slow.
This fact, along with fears of a recession, have brought oil prices down to their lowest point all year. In the waning days of 2018, oil appears to be recouping some of its losses, but these gains (8% for Brent and 10% for WTI on December 26) do not necessarily indicate a trend.
h3 $100 Oil No Longer A Possibility/h3Just a few months ago, many believed we would see oil selling for $100 per barrel before year-end. Heading into the first few months of 2019, the market could be lucky if Brent remains above $50 per barrel. WTI may stay squarely in the $40s.
Earlier this month, I described 3 key developments I believe will affect oil markets in 2019. Major catalysts are likely to be OPEC and the Iran sanctions.
OPEC will meet in April and the U.S. will review and reconsider its sanctions waivers shortly thereafter. However, if it looks like WTI won't break the $50 mark in January, traders should also keep an eye on shale oil companies, rig counts and the weekly production statistics. These low prices, combined with tighter lending practices from Wall Street, could force some companies to slow their growth during first half of 2019.
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.