International complexities make oil market hazy in 2019
A rally in the oil markets during the first days of 2019 pushed crude oil prices higher. But U.S. experts caution the intricate international complexities that drive the demand for oil are making for a hazy 2019 energy market forecast.
After an especially volatile 2018, U.S. oil producers and traders have been cheerfully surprised as the price of oil climbed during the first days of 2019. West Texas Intermediate (WTI), also known as Texas light sweet, moved past 50 U.S. dollars a barrel during the first full week in January 2019 — a sharp rebound from the low 40s dollars it was trading for just before Christmas 2018.
WTI is a benchmark for oil prices, often quoted in financial reports along with Brent crude prices, which comes from the North Sea.
Because much of WTI comes out of the ground from oil fields in the U.S. state of Texas — including the vast Permian Basin — the biggest oil producing area in the United States, the price of oil reaches deep into the Texas and U.S. economy. With Texas drilling 21.1 percent of the nation’s oil, the state ranks as the top oil producer of all 50 United States, according to the U.S. Energy Information Administration.
Edward Hirs, who teaches energy economics at the University of Houston, told Xinhua during an exclusive interview that with more pipelines to be completed this year, the issues of takeaway capacity of Permian will be resolved. However, there would be downward pressure on U.S. economy, with Texas in particular, if the oil prices drop to new low levels.
“If OPEC were to drive the price down back to 40 dollars a barrel and below, that will be devastating for the U.S. shale industry. Particularly it will be very painful for Texas and the Permian,” said Hirs. “We produce 4.5 million barrels a day, that’s a huge economic activity in the state. Driving the price down to 50 dollars or below will have devastating consequences for the Permian region.”
Though the United States became the world’s top oil producer in 2018, Hirs noted instability in the Middle East, and any subsequent reduction in the oil flow from the region, would impact oil prices.
Indeed, in early December 2018, OPEC moved to reduce oil production by 1.2 million barrels a day for the first six months of 2019. The cut was to be split between the 14 nations that make up OPEC, as well as non-OPEC nations, including Russia.
“The U.S. oil market and U.S. consumers are vulnerable to any interruption to supply in the Middle East,” Hirs said.
Hirs and other energy experts noted the labyrinth of international complexities could send oil prices up or down, including the growing clout of China. The nation’s giant economy and its accompanying thirst for oil has turned China into the second largest consumer of oil in the world, while its expanding oil industry has propelled it to a ranking of fifth in producing oil.
Michael Maher, a senior program advisor for the Center for Energy Studies at Rice University’s Baker Institute for Public Policy, told Xinhua that the economy of China is so big and its growth would affect other economies in the world.
Maher was referencing worries among some economists of a slowdown in the U.S. and worldwide economies. Such concerns have been somewhat tempered after the U.S. Department of Labor posted a robust jobs report during the first week in January, reporting that 312,000 new jobs were created in December.
Hirs agreed that the pace of the world’s economy and oil prices are closely related. The Organization for Economic Co-operation and Development (OECD), the International Energy Agency (IEA) and OPEC all forecast less economic activity across the globe for 2019.
“Oil demand is very closely tied with economic activity,” Hirs told Xinhua. “The more expensive U.S. dollar has lessened economic activity in several regions. The uncertainty of Europe with Brexit is probably going to contribute, adding to the uncertainty of the economic outcome. Less economic activity at the margin can lead to less demand for oil.”
Despite all the uncertainties, Maher expected oil prices to be more stable in 2019 than they were in 2018.
“I think you’ll see some swings, but I don’t think you’ll see 100 dollars a barrel oil or 40 dollars (a barrel),” he said. “But maybe a range of 55 dollars to 65 dollars.”