Oil prices can become even more volatile in 2019

Oil prices can become even more volatile in 2019 Photo: Sergio Russo

In 2018, the global oil market saw some of the highest prices in almost four years, but also it registered some of the largest single-day drops. Next year, price volatility is likely to continue and even intensify thanks to complicated foreign policy and, possibly, weakening global demand.

This year has been a very volatile period for oil prices due to geopolitical concerns, financial moves and unstable supply and demand, considers Forbes, adding that 2019 is shaping up to be even more volatile and offering some of the major issues to look for next year.

At the beginning of the year, oil markets are likely to see slight declines in production from OPEC countries and larger cuts from Saudi Arabia. At the latest meeting in Vienna, OPEC agreed to cut production by 2,5% compared to October levels. Iran asked for an exemption from any cuts and received it because the country's production had already declined due to US sanctions. Non-OPEC participants headed by Russia pledged to cut their production by 2%. Forbes underlined that OPEC might not have been able to reach the agreement without Russia.

However, the agreement will be reviewed in April, only a few months after it goes into effect. Simultaneously, the US will review the exemptions it granted to eight countries to continue importing Iranian oil. If the exemptions are not renewed, additional Iranian oil will leave the market, so we can expect increased market volatility. Current indications are that importers of Iranian oil will have to halt their purchases, but President Trump's administration may renew the exemptions for another 180 days in case of too high oil prices (over $70 for WTI and $80 for Brent).

Iran got an exemption from cuts because its production had already declined due to US sanctions. Photo: Adam Jones

As for the United States itself, the country's shale oil production reached 11,4 million bpd in 2018, so it finally regained its net exporter status. Next year, US production and exports can rise even higher given new pipelines coming online to move oil from producing regions to refineries and ports. However, shale oil producers will have to offer greater discounts on their product, as most of this oil is a very light type of crude oil, which is not sought after by global refiners. Thus, the profitability of shale oil producers will be limited.

In addition, global oil demand, which has been very strong over the past years, can weaken in 2019 due to an impending worldwide economic slowdown. On the other hand, low oil prices can stimulate demand, as economies like China purchase more crude for storage, and higher margins for refineries promote greater refining activity. Forbes assumes that Chinese consumption could help stimulate oil demand and keep prices from falling too significantly next year.

By Anna Litvina