We’ve been here before and since global oil markets are indeed cyclical, Citi’s new oil price forecast for 2019 should not come as much of a surprise. The bank forecasts that global oil prices will average $60 per barrel in 2019, remaining near current levels as OPEC+ led production cuts encourage American drillers to pump more crude oil. In its primary forecast, Citi said it sees Brent crude trading at $55 to $65 per barrel in 2019, as global oil stockpiles continue to rise through the middle of the year.
Citi’s forecast comes after the so-called OPEC+ group of oil producers, which includes production heavyweights Saudi Arabia and Russia, agreed on Friday to trim production by 1.2 million barrels per day (bpd), starting in January and lasting for a period of six months, with a review set for April.
The production cut immediately put a floor under prices that had slid around 30 percent from multi-year highs in October for both global benchmarks, London-traded Brent crude futures and U.S.-oil benchmark, NYMEX-traded West Texas Intermediate (WTI) crude. However, on Monday prices slid again, the most in two weeks, as traders reportedly grew skeptical whether or not the OPEC+ group can cut will be enough to drain down global oil supply levels.
Per terms of the agreement, OPEC members will shoulder most of the production cuts, coming in at 800,000 bpd, while non-OPEC countries including Russia will pick up the slack. Venezuela, Iran and Libya were exempted from the cuts as a result of geopolitical and economic pressures that already limit those OPEC nation’s production capabilities.
Citi said that an earlier round of production cuts from the OPEC+ alliance has only delayed the inevitable in oil markets. Rather than putting oil on a steady upward trajectory, the new supply cuts “almost certainly” set up another sell-off, the bank claims. “OPEC+ did the work of drawing down inventories that otherwise would have to be done through a painful period for shale producers,” Citi said. The bank added in a note that “the more OPEC+ tries to support prices by withholding oil from the market, the more they give the U.S. shale sector an out from rationing supply growth themselves.”
While an argument can be made to counter Citi’s assertion that the first OPEC+ production cuts set up another sell-off, the bank hits the nail on the head when referring to the impact the cuts will have on U.S. shale oil production.
Resilient U.S. shale oil producers
U.S. producers had been sweating it out in recent months as oil prices tanked on over supply worries, geopolitical concerns, and questions whether global oil demand growth will indeed flatten out. With prices last week threatening to settle in the $40s per barrel range for WTI, many shale producers would have been breaching or at least nearing crucial oil production break even points. Citi said that oil prices would need to settle at $45 per barrel to keep U.S. production flat.
Now that prices have support amid the Saudi-Russian output cut, U.S. shale oil producers are breathing a collective sigh of relief. This is the point where déjà vu sets in. Rewind a few years to late 2014 when global oil markets where so awash with oil that Saudi Arabia gave up conventional oil markets wisdom it had adhered to for decades as global oil markets swing producer and instead of trimming production, decided to open the oil production floodgates to not only protect market share but to drive prices to a point where U.S. shale oil producers, blamed for the supply glut all along, would be put out of business.
However, Saudi Arabia miscalculated and almost drove itself to the point of economic and financial collapse amid multi-year low oil prices. Moreover, while some U.S. shale oil producers were put out of business, a plethora of other producers simply tightened their belts, secured enough cash to make it thorough, increase drilling efficiencies and reduced their oil production break-even points. This set up the first OPEC+ production agreement in January 2017, which eventually worked enough to return OECD oil inventory levels to five year averages, while restoring oil market equilibrium, and driving prices up to recent multi-year levels.
These prices encouraged U.S. shale oil producers, now with improved drilling technology and lower production costs, to jump on the oil price bandwagon and open up the output floodgates once again, thanks in large part to the Saudis and Russians.
This same scenario could play out in similar fashion in 2019 if the OPEC+ output deal to trim 1.2 million bpd of oil from markets work with corresponding higher oil prices. However, therein lies the quandary for all involved, both Saudi Arabia and Russia and oil market pundits, including established forecasters like Citi.
Unknown variables
At the end of the day, nobody at this point can clearly answer unknown variables that will determine where prices and even demand are headed, including the success or dismal prospect of no new trade deal being reached between Washing and Beijing by March 1. No new trade deal would dampen global oil demand and prices, while unforeseen geopolitical developments, including the constant possibility of more fallout from the always volatile middle east as Saudi Arabia and Iran continue to jockey for geopolitical hegemony in the region in Syrian, Yemen and other areas, would spook markets and cause prices to increase.
Finally, the one factor in the equation that isn’t as hard to forecast is U.S. production. Even if prices tank, and remain at the low $50s price point, U.S. shale production will continue likely unabated. However, if prices head north expect even more idled oil rigs, particularly in the prolific Permian Basin, to be restarted, pushing the U.S. well past the U.S. Energy Information Administration's 12.1 million bpd forecast.
By Tim Daiss for Oilprice.com
