The difference is in the perception of where the oil market is going. Market bears foresee electric vehicles taking a larger bite out of oil consumption, and they see continued growth of U.S. oil production contributing to an oversupply of crude oil globally. They are also concerned about an economic slowdown.
OPEC is the wild card here. A big reason oil prices collapsed is that President Trump convinced Saudi Arabia to increase production to make up for oil that would be lost as a result of Iranian sanctions. But at the last minute, the Trump Administration granted generous exemptions to allow countries to continue importing Iranian oil. These exemptions are supposed to be for 180 days, but they suddenly created too much oil in the market.
Saudi Arabia was furious, and they immediately cut oil production. At the next OPEC meeting, the cartel agreed to cut production to balance the market. I expect they will have success with this strategy in 2019, the same way they did the last time they went down this path. OPEC hasn’t lost its pricing power yet, as long as they maintain discipline. I expect their previous success will be repeated this year. The U.S. Energy Information Administration projects that WTI will average $54/bbl in 2019. I think that’s too conservative.
It’s hard to project an average price, because I don’t know how long it will be before sentiment shifts. And there are still going to be those who think electric vehicles are soon going to put oil out of business. Those sentiments will impact prices. 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/bbl level.
2. U.S. oil production growth will slow in 2019 versus 2018
Except for an OPEC-induced dip in production in 2016, U.S. oil production has risen like a rocket since 2011. None of those years was bigger than 2018, when domestic oil production rose by 1.5 million barrels per day (BPD). In the six of seven years since 2011 when production did increase, it rose by an average of one million BPD. While I do expect U.S. oil production to grow again in 2019, I think the combination of lower oil prices to begin the year and a potential economic slowdown stemming from trade tensions will result in a slowing of production growth for 2019.
However, average production for all of 2018 was 10.9 million BPD. By the end of the year this level had reached 11.7 million BPD. Thus, it won’t take much of a rise to add another average of one million BPD to 2018 levels. I believe this will happen, but I don’t believe we will add a million BPD from the year-end level of 11.7 million BPD (as we did in 2018). All we need to do is sustain another 300,000 BPD in 2019 to year-end 2018 levels to average a million BPD over 2018. I can see that happening, but I don’t see a repeat of 2018’s huge growth.
3. Despite President Trump’s best efforts, gasoline prices will end the year at least $0.30/gallon higher than they began the year.