Oil Prices Poised To Bounce in 2019 — But Risks Remain

January 02, 2019

Keywords: Market News, Equity, Valuations, Economic News

Concerns over macroeconomic conditions and a growing global supply pushed oil prices downward in the final months of 2018, but the outlook for the coming year is generally more positive and stable — though not without uncertainty.

Trade disputes and heightened concerns over low growth prospects around the world have weighed on oil prices, while rising capacity in the U.S. has pushed supply and demand out of balance, pressuring prices lower.

Major benchmarks for crude oil prices lost nearly 40 percent of their value in just under three months, although year-end rallies may soften some of that decline.

Nevertheless, those declines prompted OPEC and several partner nations, including Russia, to announce on Dec. 7 a cut of 1.2 million barrels per day in output for six months beginning in January. There’s lingering concern among analysts, however, that strong U.S. production and a slowing world economy may drag down prices in the latter half of 2019, despite the OPEC cuts.

These competing factors have prompted a conflicting mix of outlooks for oil prices that continue to evolve as we head into 2019.

Predicting a Bounce-Back

From Oct. 2 through Nov. 30, West Texas Intermediate (WTI) futures fell from $76.41 a barrel to $50.93, a decline of 33 percent, as investors realized the market had become oversupplied. By Christmas Eve, WTI had dipped below $45 a barrel for the first time since July 2017. Brent crude, the international benchmark for oil prices, fell at a similar pace over the same period.

But the consensus among international government figures, financial regulators and private-sector analysts is that prices will bounce back in 2019 as supply and demand slowly balance out. Brent crude is expected to average just over $69 a barrel next year, according to a late-December Wall Street Journal poll of 13 investment banks that represents one of the most optimistic price forecasts for 2019.

The U.S. Energy Information Administration in its December report revised its 2019 price forecasts for Brent and WTI to $61 a barrel and $54 a barrel, respectively, which are both $11 a barrel lower than the agency’s November forecast. It also said it expects the world will consume an additional 1.5 million barrels per day next year.

“EIA expects that the magnitude of the recent price declines combined with the OPEC production cuts will bring 2019 supply and demand numbers largely into balance, which EIA forecasts will keep prices near current levels in the coming months,” the report states.

Evaluating Conflicting Outlooks

Concerns over the ongoing China-U.S. trade dispute and the prospect of a global economic slowdown continue to drive uncertainty in the oil sector.

The International Monetary Fund in December cut its growth forecasts for the U.S. and China, citing the trade dispute. IMF economists say they now expect growth of 2.5 percent in 2019, down from 2.9 percent in 2018. Many traders suspect such a slowdown could affect global oil demand.

Meanwhile, the International Energy Agency is forecasting a demand uptick in 2019 of 1.4 million barrels per day, while OPEC's forecast is a more conservative increase of 1.3 million barrels per day. Some Wall Street forecasts are considerably more pessimistic, suggesting the 2019 demand increase could be just 1.1 million barrels per day.

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