It only seems like a matter of weeks since everyone was captivated by how high oil prices could go…..fast forward 6 weeks and WTI has plummeted from $76 to $56. WTF is going on? Is this really what the future has in store for all of us relying on the industry for our livelihood. Those who are going grey around the edges are used to the cycles in the industry that would typically last 3, 4 or 5 years. Now, we are looking at 18 month cycles, it is going to take a lot of adjustment across the industry. So, where are oil prices headed and why- here are 8 of the many variables:
1. Iran sanctions
It was 2012 that the last major sanctions were imposed on Iran. In 2016 they were lifted with the Nuclear agreement between the international community and Iran. Plans were put in place, financial deals done. Total were one of the most active in pushing ahead with investment but then the Trump card was played. Trump was having none of it and sanctions were again imposed by the USA on oil exports in particular. In fact, President Donald Trump reinstated two sets of sanctions in which, he also restricted sales of oil and petrochemical products from Iran. Oil climbed steadily until the US started to announce a climb down on the Iran restrictions and oil has crashed more than 20% in just two months!
2. OPEC’s decisions
The second reason why no one knows where oil price is headed is that no one really knows what kind of decisions OPEC is going to take. During the summertime, OPEC boosted the oil production to near-record levels in order to balance out the supply losses from Venezuela and Iran, but exactly that move led to an unexpected twist: So the big question now is: Will OPEC really cut back the oil production or not? And what will be the consequences of their decisions?
3. USA Oil Production
With climbing Oil prices, the United States are boosting their oil production like never before. In October this year, it hit a new monthly record of 11.6 million bpd – a record which, according to EIA, would be exceeded in the second quarter of 2019 instead of the fourth quarter. And that’s exactly what could cause the growth in the global oil inventory and affect the oil prices.
4. USA Drilling Rig activity
Despite the 19% fall in the oil price, the US oil drilling activity continues to grow. In fact, the increase in drilling rig activity combined with more efficient drilling and fracking techniques is the key for record highs of US production this year. The US rig count (869 at the moment) is much higher when compared to a year ago when 763 rigs were active. In addition, take a good look at the drilled but uncompleted (DUC) wells in the US – this has risen from 6,500 a year ago to 8,545 in October 2018. When pipeline capacity increases in 2019, this backlog will come down. Great news for the fracking companies but maybe not so for Oil prices?
5. USA Pipeline capacity
Ironically, the concerns of oil shortage that took over the world ever since the US reactivated Iran’s sanctions are now replaced with concerns that maybe the market is now oversupplied. Over the next two years the prolific Permian basin will see a complex of pipelines come into play with much of that in 2019. S&P Global Platts estimate 2.6 mb/d of planned pipeline capacity will come online by 2020, with a further 1 mb/d potential that is being watched with great interest.
6. Russia’s reaction to oil drop
The United States isn’t the only country that has increased oil production in the last few months, Russia is not about to miss out on the party. Their oil production increased to 11.41 million barrels per day in October from 11.36 million barrels per day in September which is a new post-Soviet oil production record for Russia. Nevertheless, despite this Russia still doesn’t have any intentions to raise the production further. Why is this? Agreement with OPEC, disagreement with the USA? Who knows but Putin does seem to play his own game.
7. China’s oil demand.
China’s continuing increase in oil demand always amazes and confuses oil price writers. To be more precise, China imported 9.05 million bpd of crude oil in September while in October it imported 9.61 million bpd which is the highest import in the last few months. Does this mean that the China economic engine is heading back to full speed?
8. The Donald Trump effect
And finally, the Donald Trump effect! Even President Trump himself stated that the recent changes of the oil prices are actually because of him!! In part, that is difficult to argue with – Iran sanctions, China trade dispute, easy access to funds for US shale development, Russia sanctions, close cooperation with Saudi Arabia all contribute greatly beyond the simple supply or demand. What will the next presidential tweet give us?