Outlook of the Global Oil Market in 2019

There is no calm in the oil climate. Over a period of three months, from early October to late December of last year, the price of a barrel of North Sea Brent oil fell by 40% from $86 to $50 and then, within just two weeks, on the eleventh day of the new year, it rebounded by 20% to $61. Such sharp fluctuations indicate significant developments awaiting the international economy and especially the global oil market in 2019. These fluctuations first raise questions regarding the reasons for the rise and fall of oil prices in the past three and a half months and then pose another important question regarding the outlook of the global 'black gold' market in the coming months. The factors influencing the fall and subsequent rise of oil prices can be summarized as follows: 1) Following the United States' decision to withdraw from the Joint Comprehensive Plan of Action (JCPOA), President Donald Trump promised to implement the toughest sanctions in history against Iran. The main focus of these sanctions, according to him, was to reduce the Islamic Republic's oil exports to zero. As the second wave of U.S. sanctions against Iran approached, and with the prospect of this country exiting export markets, Saudi Arabia, encouraged or pressured by Washington, increased its oil production to prevent uncontrollable tensions in the market due to the cut in Iranian oil exports. Russia also increased its exports to take advantage of the situation. However, the scenario of Iran exiting the global oil market, as announced by Donald Trump, did not materialize. Just before the second wave of sanctions, without informing Riyadh, the U.S. allowed eight countries, including China and India, to continue buying oil from Iran for a maximum of six months. In this context, oil supply to global markets significantly increased, especially as unconventional (shale) oil producers in the U.S. also raised their supply. On the other hand, the international economy faced new ambiguities, particularly the trade war between China and the U.S. and the risk of a slowdown in global economic growth, which intensified the likelihood of a drop in oil demand and consequently its price. The combination of these factors led to a 40% drop in oil prices in the last quarter of the previous year. 2) The significant drop in oil prices prompted oil-rich countries, especially Saudi Arabia and Russia, to react. In the early days of December, the group of OPEC and non-OPEC countries, known as OPEC+, decided to reduce their production by 1.2 million barrels per day. Of this amount, a reduction of 800,000 barrels per day is the responsibility of the 14 OPEC member countries, with Saudi Arabia at the forefront. The 10 non-OPEC countries led by Russia are responsible for the remaining reduction of 400,000 barrels. OPEC+ consists of 24 countries that together produce about 50% of the world's oil, and therefore, if they act in coordination, they can influence the global oil market. However, there are other players who can create various obstacles to the implementation of OPEC+ decisions. The implementation of the December decision by OPEC+ has generally proceeded according to plan, and Al-Falih, the Saudi oil minister, recently stated in Abu Dhabi that oil producers are ready to reduce their production more than anticipated if necessary. On the other hand, China and the U.S. have reached compromises in their trade disputes, which could positively impact the future of relations between the two economic giants and also the global economic growth outlook, thereby helping to boost the global oil market. These are the main drivers that have contributed to the 20% surge in oil prices from late last year to today. The developments in the global oil market in the coming months depend on factors that we will highlight here: 1) As mentioned, Saudi Arabia does not hide that it will further reduce its production if necessary to balance oil supply and demand. Implementing this promise is not easy, simply because a reduction in Saudi exports could push its traditional oil customers towards its competitors, including Iraq or even Russia. On the other hand, Saudi Arabia's radical policy regarding oil reduction may provoke a strong reaction from Washington, especially since the Americans have more leverage to pressure Riyadh following the Jamal Khashoggi murder incident. 2) The growth of the global economy in 2019 faces serious ambiguities. The risk of a resurgence in trade disputes between China and the U.S. has not been eliminated. The U.S. economy entering the final phase of a relatively long-term boom is a serious possibility. Additionally, the specter of declining growth looms over both the Eurozone and the Chinese economy. In this context, there is a possibility that oil demand may not meet the expectations of OPEC and non-OPEC countries. 3) The fate of Iranian oil and the actual volume of its exports under U.S. sanctions is a big question mark. The waivers granted by Washington to eight countries importing Iranian oil will expire next May, and U.S. officials have ruled out their extension. The question arises as to how much oil Iran will ultimately export to global markets. 4) U.S. shale oil producers have become one of the major players in the global oil market, and their production levels are under close scrutiny by international oil circles. Relying on these new players, the United States has become the world's leading oil producer and is strengthening the necessary infrastructure to export this commodity to global markets. This new situation will naturally impact the outlook for the supply and demand of 'black gold' globally, in ways that are still not clear to international expert circles. 5) Oil prices in international markets are closely tied to the upcoming presidential elections in the U.S. Donald Trump is already eyeing his re-election and will fiercely resist any factor that could disrupt it. Before the recent midterm elections in Congress, Donald Trump strongly warned OPEC and Saudi Arabia about the risk of rising oil prices. American consumers (both individuals and businesses) are very sensitive to oil prices, and it can even be said that this commodity has a very high political sensitivity in the U.S. The re-election of the current U.S. president largely depends on the economic situation of the country, of which energy prices are one of the most important components. The White House is currently still seeking to eliminate Iran from the global oil market, but at the same time does not want this event to lead to a surge in energy prices. Reconciling these two goals requires cooperation from Saudi Arabia, and it seems that Donald Trump will not hesitate to use various levers to gain this cooperation. In assessing the future developments of the global oil market, all these variables must be considered. This means that predicting the average price of this commodity in 2019, if not impossible, is at least very difficult.