This isn’t supposed to happen.
By now, say many pundits, the world should have moved into ‘post-oil’ mode.
But it certainly hasn’t. Global oil production is presently some 100m barrels per day.
Crude costs still really matter for plastics, aeroplanes, heating oil, road tar – and for old-fashioned people such as me – how much fuel we can afford to put in our cars.
What’s more, I have a non-PC confession to make.
I like the idea of oil. OK, it’s unpopular to say that nowadays. But the commodity can still provide great opportunities for investors.
So what’s in store for the oil price?
My editor won’t like that headline as I’ve used it before in the context of crude.
But I reckon it’s useful to see what happened price-wise last year.
In the early months of 2018, the experts were generally bullish.
That proved correct. The OPEC (the Organisation of Petroleum Exporting Countries) cartel held its nerve on output. Last May, the US said it would re-impose sanctions on Iran. Add in further falls in Venezuelan production, and prices rose.
Then, as oil optimism became overdone, Brent crude reached $85 per barrel by early-October 2018. But then it fell back just as sharply as it had gone up.
Saudi Arabia and Russian decided to make up for less Iranian oil by churning out more supply. The Trump administration granted waivers to Iran’s major customers. And US shale output surged. Brent crude crumbled to $52 per barrel.
Since then there’s been something of a rally to the $60 per barrel region.
The backdrop has changed a fair bit over the last few months, though. Unlike before, there are now widespread fears of a global economic growth slowdown, which would crimp demand (I’ve been in the ‘beware recession’ camp for some time).
Yet despite economic growth fears, BP boss Bob Dudley reckons that 2019 demand could still increase by a further 1.4m barrels a day (bpd). That compares with an equivalent rise last year of 1.3m bpd, says the International Energy Agency (note that it only takes relatively small changes to shift crude prices considerably).
Granted, industry suppliers can be behind the curve in seeing demand downturns. But BP’s view is worth keeping in mind.
The other side of the coin is output. Both the IEA and OPEC forecast that this will expand more quickly than demand in 2019 as US shale oil output leads the way. Meanwhile OPEC and 10 other oil producers including Russia “are holding back 1.2m bpd through June in order to drain an oversupply of crude”, notes CNBC. This is oil that could return to the market in the near future.
In addition, Dudley comments that the repetition, or otherwise, of those Iranian crude waivers could yet play a big role in the oil market this year.
“Somewhere between $50 and $65 seems a fairway for producers and consuming countries”, he says.
So how might this all play out in 2019?
It’s ‘cards on the table’ time.
I’ve always said that trying to predict any short-term market moves is a mug’s game.
And I’m not planning to change my perspective on this now.
But having been wary of prices as they reached the $80 per barrel area, and then been bullish again in December as the market bottomed out, I reckon I’ve called oil pretty well in recent months.
Now I’m the first to admit that similar prescience hasn’t always been in evidence in, for example, the industrial services sector. But when the trend’s become your friend, make the most of it! So today I’ll hazard a guess about oil’s future prospects.
Venezuelan crude output is falling. And OPEC production cuts are holding, according to yesterday’s report from Vienna-based consultant JBC Energy.
I’ve been reading chemical engineer Robert Rapier’s writing in Oilprices.com. He reckons prices will rise by at least $25 per barrel in 2019.
“Bears foresee electric vehicles taking a larger bite out of oil consumption and continued growth of US oil production contributing to an oversupply of crude oil globally”, he says. But after soaring “like a rocket” post-2011, “US oil production growth will slow in 2019 versus 2018″. And OPEC – the wild card – “hasn’t lost its pricing power yet, as long as it maintains discipline. I expect its previous success will be repeated this year”.
“I don’t know how long it will be before sentiment shifts”, Rapier continues. “But I expect that by the end of the year, OPEC’s strategy will be working, and you will see oil prices get back to the $70 per barrel level”.
That’s a bullish, though hardly wildly optimistic, forecast. It makes sense to me. In turn, it suggests that your portfolio should have some exposure to the oil sector as a time when risks are building up elsewhere.
At Strategic Intelligence, that’s exactly what we’re recommending right now. If you’d like to find out more about our suggested way of playing oil, and you’re not already an SI subscriber, you can do here.