US crude-oil production may be further boosted in 2019 as infrastructure constraints in the Permian Basin could be resolved
Ravindra V Rao
Anand Rathi Commodities
Crude oil rode a dramatic rollercoaster in 2018. US crude-oil production hit a new record high in 2018. This is a watershed moment and exhibits changing dynamics in the global energy market. The trade war between the US and China weighed on crude-oil demand. OPEC's flip-flop on key policy issues continued in 2018.
Earlier this year, OPEC decided to raise crude-oil production by one million barrels a day from July 1 in order to balance the market. Investors continued to expect that the re-balancing would materialise. But those expectations were not matched. Trump is a vocal critic of Iran due to its nuclear weapons programme.
Hence he exited the Iran nuclear deal and imposed sanctions on Iran from November 1. But US policies under the presidency of Trump have turned quite ambiguous, unreliable and questionable. At the last moment, Trump granted waivers to eight countries to continue to buy crude oil from Iran. This dramatic reversal, of course, led to a huge sell-off in crude oil.
The murder of Saudi Arabian journalist, Jamal Khashoggi, showed the growing influence of Saudi Prince Mohammad Bin Salman, popularly known as MBS. The following cover-up act by US president Donald Trump had huge ramifications on the crude-oil market.
Trump also favoured low crude-oil prices and repeatedly asked OPEC to bring crude-oil prices down. He became quite aggressive on OPEC and its allies, especially after his party lost mid-term elections in the US.
Hence, Saudi Arabia landed in a soup. Saudi needs higher crude-oil prices to fill its coffers to finance its ongoing infrastructure projects. On the other hand, the country has to keep the US happy especially after it landed itself in the Khashoggi's controversy and amid the criticism it received from across the world and the ensuing embarrassment.
As a result, in a balancing act, OPEC has abandoned its production-hike deal and now plans to cut production by 1.2 million barrels per day from January 1. Hence, OPEC's flip-flop on key policy issues continued.
Crude oil is expected to be quite volatile in 2019. Fundamentals have taken a back seat and market momentum would continue to be driven by speculation. Hence, volatility will be the name of the game for the energy market in 2019.
Investors are nervous about global economic growth. As a result, there is a huge sell-off in global equities. The yield curve shows signs of a looming recession in the US.
Rising trade tensions, monetary tightening and geopolitical challenges are among the issues that might slow economic growth in 2019. The appreciation in the dollar and the run-up in US Treasury yields bring significant stress to the global financial system.
A slowdown in the global economy might contract demand for crude oil. Already, the trade war between the US and China has weighed on demand. For 2019, OPEC has cut its demand projection for its crude oil to 31.4 million b/d, one million b/d lower than in 2018.
OPEC crude oil production in November fell slightly to 32.96 million barrels per day, from 32.98 million barrels per day the month prior. Saudi Arabia's crude-oil production rose sharply in November while that of Iran fell sharply. Hence, Saudi Arabia is filling the gap left by Iran.
Libya, Iran and Venezuela were granted exemption from production cuts. It will be interesting to see whether the US grants additional exemption to eight countries to buy Iran crude oil beyond April 2019 when the 180-day waiver is set to end.
At present, the US is signalling that this exemption will not be renewed. This means that additional Iran crude oil will be off the market. But the US can alter its stance at any moment. If prices rise, the US could renew the exemptions for another 180-day. Libya's crude-oil production is quite volatile due to militant activity.
Crude-oil production of the US, Russia and Saudi Arabia are near record highs. According to the EIA, US crude-oil production is expected to average 12.06 million barrels per day in 2019, up 1.18 million barrels per day from 2018. The crude-oil output of these three countries is around 40 percent of global production. Hence, the demand-supply mismatch is expected to continue. US crude-oil production may be further boosted in 2019 as infrastructure constraints in the Permian Basin could be resolved.
Markets are concerned about whether the recently-announced production cut by OPEC would suffice to curb the oversupply glut or not. Hence, there are talks that OPEC might cut production more-than-previously anticipated.
In April, the OPEC will review the impact of its production cut. It has rescheduled its mid-year meeting to April. If the output cuts are not adequate, OPEC is ready to hold an extraordinary meeting and will do what is needed to balance the market. Overall, crude oil is expected to experience sharp volatility in 2019.
The author is the Head - Commodity Research & Advisory at Anand Rathi Commodities.
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