Oil and Gas Outlook 2019: Output Cuts to Correct Market

2018 proved to be a volatile year for the energy sector, especially oil. Despite many predicting that the year would offer price stability for the space, the opposite proved true.

The oil market saw wild price fluctuations this year. Brent crude started strong in January, trading at US$66.87 a barrel, then soared to a yearly high of US$84.16 in October before dropping to its 2018 low of US$59.04 in November.

The year played out very much the same for WTI crude, which started the year with upward movement from its January price of US$60.42 a barrel. In October, it hit its yearly high of US$76.41 before plummeting to US$50.93 some five weeks later.

The opposite occurred in the natural gas sector. For much of the year gas traded flat at just below US$3 a British thermal unit (Btu). Then in late September prices began a slow ascent, likely brought on by growing demand as the winter months approached.

In mid-November, gas hit its yearly high of just below US$5; it has sat between US$4.29 and US$5 since.

As 2018 comes to a close, the Investing News Network is looking back at the main trends in the oil and gas space during the year, and at what the oil and gas outlook is for 2019. Read on to learn what analysts and market participants think is coming in the new year.

Oil and gas trends 2018: Geopolitical uncertainty weighs heavy

This year saw a number of factors weigh heavily on the oil sector, creating volatility and uncertainty. The year was marked with interesting news, from US President Donald Trump’s Iran sanctions and tweets to OPEC, to increased output in the US and Canada’s purchase of a multibillion-dollar pipeline.

For economist Oliver Reynolds of FocusEconomics, one of the most influential catalysts in the oil sector was the US president.

“One key trend has been the huge market influence held by one man: US President Donald Trump. His decision to reimpose sanctions on Iran earlier this year led to a surge in prices, as investors anticipated that Iranian oil supply would be choked off,” explained Reynolds. 

The unpredictability was then reinforced by Trump’s subsequent actions.

“Then, with crude prices uncomfortably high, Trump abruptly changed tack and announced waivers on Iranian oil exports,” added Reynolds. “All of a sudden, the music stopped as oil investors were forced to rapidly reassess the market situation, and oil prices tanked.”

The fear that Iranian sanctions would leave a major oil shortfall carried on for the most of the year. Ahead of the November sanctions, a number of international energy producers, including Total (NYSE:TOT), began curtailing dealings with the OPEC nation in order to comply with the US order.

Ultimately the president ended up issuing exemptions for certain nations and entities.

As Reynolds pointed out, “the recent waiver announcement came as a sucker punch to the market, which had become completely wrapped up in its own narrative of tight supply due to the Iran sanctions.”

The looming Iranian sanctions weighed heavy on the oil market for much of the year, creating fear and driving prices higher. While the rhetoric of the US leader caused some analysts to foresee a long-term shortage, others, like Capital Economics’ Thomas Pugh, saw through the posturing and realized it was less bite and more bark.

“Indeed, we had long argued that supply fears over sanctions on Iran were overdone, as other producers in OPEC are more than able to offset the decline in Iran’s output,” said Pugh.

“And given that eight large consumers of Iranian oil have been granted waivers for the next six months, US sanctions on Iranian oil should not severely disrupt the oil market.” He continued, “a big surprise to the oil market has been US President Donald Trump’s direct and public communication about oil prices (specifically his tweets), which has caused speculation over OPEC’s role in the oil market.”

Oil and gas trends 2018: Supply and demand dynamics

In mid-December, OPEC met to discuss the future of the sector. The group of oil-producing nations agreed to cut 1.2 million barrels per day (bpd) starting in January to address a global production glut.

OPEC, which includes 15 countries — Iran, Iraq, Kuwait, Saudi Arabia, Venezuela, Qatar, Libya, UAE, Algeria, Nigeria, Ecuador, Gabon, Angola, Equatorial Guinea and Congo — will cut output by 800,000 bpd.

Meanwhile, non-OPEC nations — Russia, Azerbaijan, Bahrain, Brunei, Equatorial Guinea, Kazakhstan, Malaysia, Mexico, Oman, Russia, Sudan, South Sudan, Brazil and Bolivia — will remove 400,000 bpd.

In an effort to do its share to stabilize the market, Canada has also announced it will decrease oil output by 325,000 bpd in January.

The market reacted to the announcement positively, with Brent crude trending to a weekly high of US$63.27 before it settled at US$60.53 on December 13.

Oil and gas outlook 2019: Key factors to watch

As noted, for oil the year will start with significant production decreases across the globe aimed at driving prices higher, despite production steadily ramping up in the US.

“Looking ahead, it has been our long-held view that slower global economic activity will be a factor weighing on oil demand in 2019,” said Pugh.

“Moreover, the oil market should be well supplied, as production in the US should pick up sharply in 2019 as pipeline constraints in the Permian Basin are resolved.”

Reynolds also sees geopolitical issues affecting the market in the new year.

“The current waivers on Iranian oil exports are due to expire after 180 days, but an extension cannot be ruled out — particularly if oil prices at that time are still too high for comfort,” he said. “On the demand side, an intensification of the US-China trade spat will be a key factor to monitor.”

When it comes to gas, the market is expected to remain steady, with a slight dip in the summer months; however, this may be offset by growing international demand.

“We are relatively positive on the outlook for US natural gas. We expect strong growth in consumption to keep prices elevated in 2019,” added Pugh. “And although US production is growing at a rapid pace, falls in stocks suggest that it is failing to keep up with demand growth.”

Pugh sees increased demand from Asian countries as a positive catalyst for price movement in the new year, while potential oversupply may keep prices from reaching new highs.

“Furthermore, Asian demand for LNG is also expected to continue to grow in 2019, as the cleaner properties of gas are making it an increasingly popular fuel in Asia,” said Pugh. “A risk to our outlook is rising LNG supply, notably from the US in 2019, which will act as a lid on LNG prices next year.”

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Securities Disclosure: I, Georgia Williams, hold no direct investment interest in any company mentioned in this article.

Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence