Oversold oil market will give way to gains in 2019, experts predict
Oil’s on track to suffer its worst quarterly loss in four years, but analysts expect prices for the commodity to give way to higher prices in 2019 as investment in the market and crude production slows.
Futures prices for U.S. benchmark crude oil has dropped more than 36% quarter to date as of Thursday—on track to log their largest such decline since the fourth quarter of 2014, according to Dow Jones Market Data. The February West Texas Intermediate crude contract traded 4.3% lower at $46.09 a barrel on the New York Mercantile Exchange Thursday.
The market is likely “oversold” as it “continues to react to the slow removal of that glut of oil left over from the failed Iran sanctions,” said Matt Badiali, senior research analyst at Banyan Hill Research, specializing in oil and commodities. “That’s a fact—there is too much oil on the market today.”
Saudi Arabia and other major oil producers had raised production as global supplies tightened ahead of U.S. sanctions on Iran’s energy sector but as the sanctions came into effect in early November, the U.S. granted waivers to eight nations, including China, allowing them to temporarily continue to import Iranian crude.
The market needed 700,000 or 800,000 barrels a day “to cover what actually came off the market from Iran,” said Badiali. But from May to November, however, the U.S. added over 1 million barrels a day, Saudi Arabia added almost 1.1 million barrels a day and Russia added another 345,000 barrels a day, he said. “So yes, there is a huge glut of oil.”
Added to that, the trade dispute between the U.S. and China has raised worries about a slowdown in the global economy, which could hurt energy demand.
The oil market is pricing in lower demand in 2019 but at the same time, “it’s giving zero credit to OPEC’s stated cut, so that leads me to believe we are a low in the oil market,” Badiali said.
At a meeting earlier this month, the Organization of the Petroleum Exporting Countries and some nonmember oil producers, including Russia, agreed to cut 1.2 million barrels a day from October levels, with the reduction to begin at the start of the new year.
Despite that pact, WTI prices have lost over 9% month to date.
For now, “it is the same story with concerns of strong supply and slowing global demand,” said Brian Youngberg, senior energy analyst at Edward Jones. “The OPEC cuts will take a few weeks to have any impact and markets are concerned it will just be offset by growing shale production.”
On Monday, the Energy Information Administration forecast a rise of 134,000 barrels a day in U.S. shale-oil production for January 2019 to 8.166 million barrels a day. That’s up 26% from January 2018, according to James Williams, energy economist at WTRG Economics. “That has to be scary for OPEC,” he said.
Still, analysts point out that the lower prices the market has seen for oil will start to have an impact on exploration and production.
“At sub-$50 per barrel, drillers are going to curb new investment,” said Badiali. In the Permian basin, given the costs associated with producing and transporting that oil, the price per barrel is “WTI minus $6 or $7 per barrel—so $47 per barrel WTI is actually $40 to them.”
“That’s not economic,” he said. “That supports the case that we should see the oil market stabilize in 2019 at a higher price.”
Overall, oil prices will continue to “be difficult to predict,” said Youngberg. “2019 will be volatile just as 2018 was.”
Even so, he still offered some predictions for next year. He sees WTI prices averaging $60 a barrel and global benchmark Brent averaging $66 in 2019. That would mark increases of roughly 30% for WTI and 20% for Brent from Thursday’s levels.