Updated: Jan 7
Uncertain outlook for the global economy, trade war and Opec's compliance with production quotas are among the factors that will control oil prices in the new year.
The year we lay behind us is a story of a big upturn followed by a big downturn for the oil price. We've entered a new year, the market is characterized by a supply surplus. However, Opec has recently agreed to make new cuts in production. When Opec agreed to begin cutting crude oil production again, hardly anyone in the cartel thought the effect of the news on prices would be as unproductive as it turned out to be.
In the past year, oil prices rose sharply on fears of a significant drop in supply as a result of Iranian oil being excluded from the market. Then the price fell as it turned out that many countries got exceptions, so that the loss from Iran did not become as great as one feared.
Overall, there seems to be agreement among analysts that the market will tighten somewhat in the coming year, but there are several uncertainties inside the picture.
New Year - New Oil Outlook
If the US decides not to extend the exemptions from complying with the sanctions against Iran, which they have given to several countries, it could send the oil price up.
Iran most likely has to reverse some of its electricity production from gas to oil on several of its plants, because they do not have enough access to gas due to the production decline as a result of the sanctions.
Furthermore, Libya's production level is as usual a joker in the oil market, as the country's unstable conditions tend to affect oil production.
Libya has been producing at high levels lately, but historically one has seen very much volatility there. If the production suddenly falls back, it can pull the price up.
Whether or not Opec and the other partner countries comply with their production quotas will also be crucial. At the previous cut, they seemed to hold good discipline, they delivered what they promised, but it was largely because the production in Venezuela collapsed. There is no guarantee they will do the same this time.
Venezuela has been taken out of the cut group. The country is struggling economically, and the fall in production accelerated in 2018. Now they produce about 1.2 million barrels a day. A large part of the profits go to pay off loans and interest to China and Russia, so very little goes to the Treasury. There are no international players working there anymore because of fear not getting paid. If the production in Venezuela falls more than expected, which is not unlikely, next year's market balance may quickly become very tight.
Trade War Between China and the US
It is hard to escape the ongoing trade war between the United States and China when talking about the oil prices.
There is strong growth in US oil consumption at the moment, the US oil intensity is higher than one might expect. If growth in the US economy continues at a decent level, there will probably be some upside in demand there.
Meanwhile, fear of weakening global demand has been a contributor to the fall in oil prices in the autumn. Stock markets all over the world have softened and have been priced into lower global economy growth. Many fear that there will be a recession in the US in a few years, which of course will bring global markets down to a large extent.
Today's price of US oil (WTI) indicates that much of the growth in production will disappear if the current price level persists, as the oil price is now close to the break even price of shale oil.
In recent months, figures have shown higher growth than expected, seeing a declining growth will be an important factor.
The main argument for rising oil prices, is good growth from shale oil is needed in the future in order to balance the oil market, and that's not likely to happen when WTI is priced below $50 a barrel.