But then President Trump also undercut oil producers by waiving sanctions on Iran. Leading up to the implementation of sanctions on Iran that would cut off their oil exports, Trump persuaded 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. But I expect Saudi to approach things differently in 2019.
Verdict: Higher Oil Prices 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.
I 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. I expect they will do so given the positive results from the previous production cuts, and therefore I expect the price of oil to recover back above $60/bbl in a few short months.
I would note in conclusion that 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. This is setting up the sort of disconnect I saw in the natural gas markets a few months ago. This disconnect led to a >60% rally in natural gas prices.
But there’s still the Trump wildcard. As long as he is committed to lower oil prices, he will continue to cajole and coerce Saudi Arabia for more oil production. I expect he will have less success with this approach in 2019.
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