The oil market will be in two halves in 2019, according to Wall Street forecasts.
Oil analysts expect prices to recover in the first six months of 2019, after the sale had cut crude oil prices by about 40 percent since October. In the last half of the year, however, commodity watchers expect new headwinds for the oil market.
The result is that Wall Street expects a moderate recovery in the oil sector in 2019. The investment banks see Brent crude, the international oil price benchmark, average USD 68-73 a barrel next year. Forecasts of US crude oil prices usually range between $ 59 and $ 66 per barrel.
Last week, for the first time since July 2017, Brent fell below $ 50 a barrel for the first time, while US crude rebounded from a one-and-a-half-year low of $ 42.36. Both benchmarks have lost more than 40 percent of their value as expectations of growth in oil demand and rising output from top US, Saudi Arabian and Russian economies weaken.
While the outlook for 2019 seems brighter, there are warnings in the year-end research notes that oil prices could rise or fall outside this range. Risks range from closely observing macroeconomic factors such as the US-China trade dispute to undervalued threats emanating from Asian refineries.
The way to recovery
The main drivers of the expected rally in the first months of 2019 are OPEC policy and North American oil production.
OPEC, Russia and several other manufacturers will introduce new production cuts in January to remove 1.2 million barrels a day from the market. Producers began limiting production in January 2017, but lifted their borders in June before US sanctions on Iran, OPEC’s third largest producer, came up.
The Alliance will be involved in correcting Alberta in Canada. The local authorities called on manufacturers to cut production by 325,000 bpd to drain overcrowded oil supplies. The storage tanks are full as the province does not have enough infrastructure to transport crude oil.
Pipeline bottlenecks are also slowing growth in the US. It is expected that the carryover restrictions in the nation’s top slate, the Permian in western Texas, will continue for at least the first half.
However, in the latter half of 2019, US output is fluctuating from a bullish uptrend to a declining oil market. As new pipes enter the market, US oil is expected to rise sharply and put further pressure on crude oil prices.
OPEC could compensate for this increase by expanding the production cuts that expired in June. The alliance will convene in April to examine whether market conditions will ensure retention of restrictions.
A lot of risk in forecasts
However, doubts about the effectiveness of OPEC cuts support one of Wall Street’s most negative predictions. Ed Morse, Global Head of Commodities at Citi, said the delivery caps encourage American drills to bring more crude oil to the market and “almost certainly” launch another sell-off.
It is expected that Iran’s exports to May will continue to fall as sanctions for several of the largest customers of the Islamic Republic expire. The Trump administration granted the six-month exemptions to prevent price increases. It is clear that after expiry of the exemptions, oil prices will play an important role in President Donald Trump’s calculations.
“If prices stay in the low $60s, the Trump administration would have even more leeway not to grant waivers,” said Michael Cohen, head of energy markets research at Barclays. “In our view, only if prices spike above the $80 level would the US not enforce continued significant reductions in Iran’s ability to export.”
Macroeconomic conditions will also play a role. Analysts predict that economic growth will remain fairly robust at the beginning of 2019, supporting an increasing demand for fuel. However, this growth is expected to slow down towards 2020.
“As we look ahead, we expect oil demand growth to remain firm in the next couple of quarters as our economists forecast a turnaround in manufacturing PMI and industrial production” said Abhishek Deshpande, director of oil market research and strategy at J.P. Morgan Chase.
“However, this recovery is unlikely to last as structurally demand should slow in 2019-20 based on our economists’ projection for GDP” Deshpande wrote in J.P.Morgan’s latest quarterly outlook.
The biggest economic risk is that customs tariffs between the US and China are turning into a full-blown trade war. The world’s two largest economies could impose tariffs on all goods carried between the two giants if they fail to make a final deal in the coming months.
An economic slowdown in China could have a significant impact on the energy markets as Asia is the engine of oil consumption, while demand in the developed western countries is quite weak. While Asia has performed well in recent years, the oil market’s dependence on the region for growth still poses a downside risk to crude oil prices, according to RBC Capital Markets.
According to RBC analysts, the biggest threat to the oil market in 2019 is China. Although China has been flooding a lot of crude oil, it has also produced huge quantities of refined products such as gasoline. The company warns that oversupply of Chinese fuel could cause contagion in the global oil market.
According to RBC, “the continuation of the current increased refinery run rate would intensify the already downward gasoline footprints and possibly trigger a domino effect in which an oil glut of gas produced in the East will ultimately sound to the west and lead to an oil market led down by an oversupply of refined products. ”