Five factors fueling the oil market in 2018
It was a rollercoaster-ride of a year for the oil markets, with Brent prices soaring to a high of $86 in October, before a dramatic crash to as low as $50 earlier this month.
With a few blips along the way, the first three quarters saw prices move upward, with strong trading activity in the physical markets, healthy demand and refining margins.
The bearish horizon that clearly weighed on market sentiment in 2016 and the uncertainties of 2017 all but vanished in the first nine months of this year, when stability returned to the market.
Yet all that was undone in the final quarter, when the massive equities selloff in the US, as well as interest rate rises, coincided with oil prices nosediving.
Here are some of the key factors that fueled the oil market this year:
1. Stock, oil markets moving together
The global equities collapse in the forth quarter — exacerbated by the US Federal Reserve’s signals that it plans to keep increasing interest rates — coincided with a steep drop in oil prices. That followed a similar scenario in early February, when oil prices and US stocks fell sharply in parallel. Analysts see this link persisting in the immediate future. “For the time being, the stock market and the oil market will echo each other,” Ahn Yea-Ha of Kiwoom Securities in Seoul told Reuters. “Global economic slowdown worries have been weighing on stock market movements, and oil prices are not free from those concerns.”
2. OPEC+ success in stabilizing markets
This year proved that the historic OPEC+ agreement — in which the producer group and several others, led by Russia, agreed to slash oil output — could have success in helping to balance the market. Oil price movements have taken a gradual upward trend since the beginning of 2017, when OPEC+ began its output cut of 1.8 million barrels per day (bpd). While prices retreated in the last quarter of this year, compliance with a new agreement to cut by 1.2 million bpd, which starts in January, will be of vital importance to the market in 2019. Yet it is premature to judge how effective the output-cuts strategy will be before it kicks in.
3. IEA injects dose of pessimism
Throughout much of 2018, the Paris-based International Energy Agency (IEA) neglected the largely bullish sentiment in the physical oil market — and instead put out pessimistic forecasts. For example, the IEA started to insinuate that the global oil market is firmly in the shale era, and that output growth from the US will offset OPEC+ cuts in 2019. Yet all the evidence shows that the IEA’s goal is to push down oil prices. On top of that, contradictions emerge when the IEA’s oil market reports and one-off announcements are scrutinized, leading to questions about the IEA’s reading of market fundamentals.
4. Higher demand means there’s room for shale
Global oil demand recently passed the 100 million bpd mark. And as demand grows, there will be room in the market for shale from the US. The growing oil demand welcomes any new supplies that help the oil market fulfil its need, be it shale or conventional oil outputs.
5. US’ sudden waivers on Iran sanctions
Earlier this year, OPEC producers readied themselves to offset any supply shortages caused by US sanctions on Iranian oil exports, but the US surprised the market with waivers to eight of the major importers. That saw oil prices nosedive amid concerns over a surge in supplies. Yet OPEC+ reacted effectively to this sudden change in US sanctions, through its deal to cut outputs by 1.2 million bpd.
- Faisal Mrza is an energy and oil marketing adviser. He was formerly with the OPEC and Saudi Aramco.