December 2018 Monthly Average Crude Oil Price

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The monthly average U.S.-dollar price of West Texas Intermediate (WTI) crude oil in December extended losses when dropping by $7.44 (-13.1%), to $49.52 per barrel. The decrease occurred within the context of a stronger U.S. dollar, the lagged impacts of an 823,000 barrel-per-day (BPD) rise in the amount of oil supplied/demanded during October (to 20.8 million BPD), and a plateauing of accumulated oil stocks (monthly average: 442 million barrels). 

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From the 31 December 2018 issue of Peak Oil Review:

Most major investment banks are forecasting a rebound in oil prices in 2019.  However, forecasts vary widely.  Bank of America Merrill Lynch, for instance, sees WTI averaging $59 per barrel in 2019; Citi is at the bearish end with a forecast of oil averaging $49 per barrel; and Barclays, along with half a dozen others, says the WTI benchmark will average around $72 next year.

The OPEC Production Cut:  The continued decline in oil prices this month has raised concerns among oil exporters who had been expecting that their announcement of a 1.2 million b/d production cut would send prices higher.  Implementation of the production cut, however, has been somewhat lackadaisical, with exemptions for several members, and Moscow is waiting until spring before fully lowering its.  Now we are told that OPEC and allied oil producers are ready to hold an extraordinary meeting and will do what is needed if the current cut in oil output by 1.2 million b/d does not balance the market next year.

The United Arab Emirates’ energy minister said last week “If we are required to extend for (another) six months, we will do it … I can assure you an extension will not be a problem.”  Saudi Arabia’s OPEC governor, Adeeb Al-Aama, said his country is fully committed to the reduction agreement, adding that Saudi production in January was seen at 10.2 million b/d, lower than its output target of 10.3 million b/d under the recent pact.  The kingdom has over-committed with previous cuts, reducing by more than its share and reaching compliance of 120 percent from January 2017 until May 2018, Al-Aama said.

OPEC and Russia-led non-OPEC oil producers are unlikely to create a formal joint organization for managing the oil market, Russia’s Energy Minister Novak said last Thursday.  Although Russia and OPEC have been touting the idea of “institutionalizing” their cooperation in the oil market by forming some kind of organization, Novak said the idea had now been discarded.

“There is a consensus that there will be no such organization. That’s because it requires additional bureaucratic brouhaha in relation to financing with the US side,” Reuters quoted Novak as saying at a briefing with reporters.  Russia has been concerned with the possibility that the US could pass the so-called No Oil Producing and Exporting Cartels (NOPEC) Act that could pave the way to antitrust lawsuits in the US against the cartel and its national oil companies.  According to analysts, the possibility of a NOPEC Act has been a big concern for OPEC members lately as it could damage their relations with the US and result in sanctions similar to those imposed on Iran.

In addition to NOPEC, the cartel is facing several other problems in the coming year. Its rotating presidency is due to fall to Venezuela who will send a general with zero oil industry experience to lead the cartel.  The alliance with Russia means that any effective policy will require that Moscow be on board indicating that the Saudis and their allies are no longer in complete control.  The continuing growth of US shale oil production in the coming year suggests that the US alone could nullify much of an OPEC+ production cut.  Oil traders are becoming apathetic to announcements from OPEC as to what the cartel plans to do.  In the past, a leak or hint from an OPEC official was enough to send oil prices off in the desired direction.  In today’s world, this is no longer true. 

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Selected highlights from the 4 January 2019 issue of OilPrice.com’s Oil & Energy Insider include:

U.S. shale activity slowed in fourth quarter. The collapse of oil prices in the fourth quarter of 2018 led to a slowdown in the shale patch. The business activity index published by the Federal Reserve Bank of Dallas show that activity decelerated and production growth slowed. The data suggests that the U.S. shale industry was very responsive and sensitive to lower oil prices. The average prediction for year-end WTI prices from oil and gas executives was $59 per barrel.

OPEC production fell in December. OPEC’s oil production fell in December to 32.68 million BPD, down about 460,000 BPD from a month earlier, according to Reuters. It was the largest monthly decline in two years. The reductions came ahead of the OPEC+ deal, which begins this month, and suggests that Saudi Arabia wanted to unilaterally tighten up the market. Saudi Arabia alone slashed output by 400,000 bpd, and Saudi officials said they would cut deeper in January.

U.S. shale production problems. The Wall Street Journal reported that U.S. shale companies have over-hyped the production potential from thousands of shale wells. “Two-thirds of projections made by the fracking companies between 2014 and 2017 in America’s four hottest drilling regions appear to have been overly optimistic, according to the analysis of some 16,000 wells operated by 29 of the biggest producers in oil basins in Texas and North Dakota,” the WSJ wrote. “Collectively, the companies that made projections are on track to pump nearly 10% less oil and gas than they forecast for those areas.” The WSJ calculated that the lower-than-expected production adds up to nearly one billion barrels of oil and gas over 30 years, worth more than $30 billion at current prices.

Offshore drilling plans delayed on government shutdown. The U.S. Interior Department delayed the release of a proposed plan for offshore oil and gas leasing sales from 2019 through 2024 due to the ongoing government shutdown, according to S&P Global Platts. The plan was supposed to be released in mid-January but is now likely delayed.

The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.