Energy Voice | Oil prices in 2019: never celebrate too early

ALSO READ: Biggest rebound in two years for oil price

A very eventful crude oil market year comes to its end. What is remarkable, though, is that, despite all these events, the oil price now is roughly at the same level as at the beginning of this year – only a few dollars below. In this sense, this year is not very different from 2016 or 2017. In other words, the long-term horizontal trend is still intact; oil prices indeed seem to be lower for longer.

However, there is also a remarkable difference compared to previous years: from January until about end of October, the oil price seemed to have followed a relatively stable upward trend. Brent prices even exceeded $80. And just about the time the discussion emerged whether or not $100 are going to be reached, the price began to decline again; however, much steeper than the upward movement in the first 10 months of the year.

Perhaps oil prices are nowadays even more unpredictable now than they usually are. The decline in the last two months surprised many. Unexpected increases in supply, mainly in the US and other non-OPEC countries, played an important role.  What complicates the situation is that this supply increase occurs just at a time the uncertainty, which is usually large anyway, seems to be even larger: Europe is dealing with Brexit, the world is dealing with trade wars. Thus, it is not easy to predict how oil demand will develop in the near future.

The flexibility of US shale production and the high responsiveness could be blessing in a situation like this, but also a curse. A blessing because US shale has the potential to be a market stabilizing factor, a correction mechanism. This could be important just because recent supply increases come from non-OPEC countries, leaving a question mark on OPEC’s power. At least OPEC recently agreed to curb production, thus, OPEC is functioning; however the effect on the price was limited. US shale, however, also could be a curse because US shale production seems to overreact; this results in even higher oil price volatility.

It is very likely that all these factors will play an important role in 2019, in addition to the usual political risks. If supply remains to be high and if demand suffers, it is unlikely that, oil prices will be much higher at the end of the next year than now– but volatility could remain high. Remarkable is that the outlook in the medium run just seems to be the opposite compared to the short run: the discussion about the supply gap after 2020 is still alive. There are still concerns that the drop in exploration investment and the associated massive decline in new discoveries will have an effect on oil supply at some point.

Two interesting questions will play an important role: first, what are decision makers are going to make out of this? While the oil price was still increasing this year perhaps some in the industry became confident that prices would no longer be that low. With increased confidence, more investments would have happened. After this unexpected decline, though, decision makers are likely to be even more careful. Uncertainty is never good for investments. Now the situation seems to be particularly challenging. Second, it seems to be of utmost importance that the industry remains cost efficient. This is easier said than done, given the strong cyclicality of the industry.  Perhaps this is lesson we learned in 2019: never celebrate too early.

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