Oil Price article30 Dec 2018 23:41
I’ve distilled the essentials from this interesting article by Robert Rapier- best read in its original form:
https://oilprice.com/Energy/Oil-Prices/Why-Oil-Prices-Rose-And-Crashed-In-2018.html
Highlights:
Trump has been vocal about the need to keep oil prices low, even though the U.S. becomes an increasingly important global oil producer.
This would have been an understandable position a dozen years ago, when net imports had reached 14 million barrels per day (BPD). But today, with net imports of crude oil and finished products transitioning into net exports, it does not make sense.
Low oil prices are a threat to the dream of U.S. energy independence, as they reduce the incentive to invest in new oil production. Low oil prices are also a threat to renewable fuels like ethanol, which become less competitive in a low oil price environment. The oil states are mostly Trump country. However, Trump has taken actions that have hurt U.S. oil producers.
China had become a major importer of U.S. oil to the tune of 500,000 BPD. But the trade war with China resulted in China halting imports of U.S. oil. This loss of market has hurt U.S. oil producers, and helped push inventories higher in the U.S. This further hurt U.S. oil producers by pushing prices down.
Trump also undercut oil producers by waiving sanctions on Iran and persuading Saudi Arabia to begin pumping more oil to compensate for Iran’s pending lost exports. Then, just before sanctions were set to go into effect, Trump announced that waivers would be given to a number of countries to allow them to continue to import Iranian oil. Among those countries was China, which ironically means U.S. oil producers lost business to Iran as a result of this decision.
Saudi Arabia felt double-crossed by the decision to grant waivers, which resulted in too much oil in the market. The price of oil predictably plunged…...expect Saudi to approach things differently in 2019…..
Following the waivers on Iranian imports, Saudi Arabia vowed to cut production. The market wasn’t convinced, and crude oil continued to fall. But then OPEC surprised a lot of people by agreeing with Russia to cut a total of 1.2 million BPD of oil from the market. The last time OPEC announced a major cooperation agreement with Russia, oil prices rallied from the $40s up past $70/bbl once it became apparent that the group was sticking to its agreement…..expect similar results this time.
Jointly, OPEC and Russia produce more than 50% of the world’s oil. They have significant pricing power if they manage to maintain discipline. If they do then expect the price of oil to recover back above $60/bbl in a few short months.
There was another draw on U.S. crude inventories this week, the third straight decline. Inventories of petroleum and finished products are now 17.5% lower than they were a year ago. Despite this, U.S. crude oil prices are more than 20% lower than they were a year ago. As long as Trump is committed to
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