- The market is awaiting an OPEC meeting on June 22, and analysts hold different views on future oil price movements. Some analysts believe that OPEC's possible increase in production in the second half of the year, soaring US shale oil production, and a decline in oil demand will lead to a decline in oil prices. Another group of analysts believes that global inventories fell to target levels, Venezuela, Libya, Nigeria's oil production decline, and pipeline bottlenecks in the US Permian basin will push up oil prices.
As the market waits for the OPEC meeting on June 22, the oil price is currently in a state of wait and see. Although the results of this meeting will almost completely control the recent trend of oil prices, analysts hold a completely different view of the future oil price trend.
The following are the reasons given by analysts looking at both oil and bearish oil prices:
Reasons for seeing oil prices Oil prices have fallen from a high of $80 a barrel. The direct reason is that the market once again believes that OPEC will increase oil production in the second half of this year. In fact, the single biggest factor driving the decline in oil prices is the sharp increase in OPEC oil supply.
However, OPEC and Russia are not the only factors that contribute to oil prices. Other factors may help control oil prices around 2019.
The first thing that comes to mind is the surge in US shale oil supplies. Since the beginning of this year, US shale oil production has increased by about 800,000 barrels per day, which is an amazing figure.
The infrastructure constraints of the US Permian Basin are real. But so far, this factor has not reduced oil production. The US Energy Information Administration estimates that US production in June will increase by 80,000 barrels per day from the previous month. In 2018, the average US production will reach 10.8 million barrels per day, but it will not stop there. The US Energy Information Administration estimates that US oil production will surge by 1 million barrels per day in 2019, with an average production of 11.8 million barrels per day.
The International Energy Agency estimates that oil demand will increase by at least 1.4 million barrels per day this year, but the supply of non-OPEC member countries (mainly US shale oil) will increase by 2 million barrels per day. The same is true in 2019: oil demand will increase by 1.4 million barrels per day, and oil supply in non-OPEC oil producing countries will increase by 1.7 million barrels per day. These data show that the growth rate of production in the United States and other OPECs is far enough to meet the growth of global demand.
These numbers are thought-provoking in themselves. Once OPEC production increases by 1 million barrels per day, the market will begin to be in a state of adequate supply from next year. JPMorgan Chase wrote in a report: "Although the geopolitical tensions and the ongoing oil supply disruption risk are still upside risks in the second half of 2018, we believe that oil prices will be lowered before the end of the year and will continue to be in 2019. Still subject to restrictions."
There is also some risk in the demand for oil, not just the impact of rising oil prices on demand. In May of this year, the International Energy Agency lowered the demand for oil by 100,000 barrels per day because of high oil prices. The economy in emerging markets is likely to slow down, which may drag oil demand growth. In the past few months, currencies in countries such as Argentina, Turkey and Brazil have been volatile. Argentina seeks assistance from the IMF, Brazil has triggered a nationwide strike due to high oil prices, and the country is temporarily paralyzed.
In addition, the Fed is imposing a rate hike, which puts pressure on the debtor countries, making it more difficult for them to pay their debts, especially in the case of a currency depreciation against the US dollar. This is by no means an unexpected result, but a recession may reduce the demand for oil. Bank of America Merrill Lynch said that due to the dangers of emerging markets, oil prices may fall to $60/barrel in 2019.
Reasons for seeing more oil prices
For analysts looking at more oil prices, the reasons for the rise in oil prices are even more pronounced. Global oil inventories have returned to the five-year average. For most of the past 18 months, OPEC has reduced its oil supply by more than 1.8 million barrels per day.
However, the prospect of rising oil prices is due to the severe shutdown in several regions, and Venezuela bears the brunt. This South American country’s oil production this year has been reduced by 350,000 barrels per day, and it is still accelerating. The operations of the Venezuelan National Oil Company’s refineries and storage facilities in the Caribbean were disrupted by ConocoPhillips. In addition, Venezuela’s oil facilities are limited in production due to dilapidation.
Because there is not enough storage space, the upgraded facilities have to be shut down, and Venezuela's already declining oil production will have to continue to shrink. In any case, the country’s ports are unable to handle the amount of exports that Venezuelan National Oil Company has promised to its customers. This may lead to the declaration of force majeure in Venezuela. In the end, Venezuela’s average oil production in May was 1.39 million barrels per day, which is rapidly falling to the important psychological barrier of 1 million barrels per day. No one knows whether the future will continue to decline.
However, supply disruptions are also looming elsewhere. Due to US sanctions, Iran's oil supply may be reduced by 500,000-1 million/day, although there is great uncertainty in this situation.
At the same time, there are reports that the two largest oil ports in Libya have stopped loading oil this week due to clashes between hostile groups. Years ago, Libya’s political instability and civil war hit the country’s oil production. Since then, this number has recovered to about 1 million barrels per day, which is roughly twice the number a year ago. However, recent conflicts have reminded people that they cannot make assumptions about Libyan oil production.
Nigeria’s oil exports are also falling as an important oil pipeline has been closed. Foreign media estimates that Nigeria’s oil exports may fall from just below 1.8 million barrels per day in June to 1.43 million barrels per day in July. In addition, the Nigerian Bonni light oil export depot may be affected by force majeure.
OPEC may increase oil production, but the increase in production may not even offset the impact of supply disruptions. Moderate increases in Saudi Arabia and Russia may be offset by falling production in other countries, especially if both conditions occur simultaneously.
The only factor preventing the price of oil from rising to $100/barrel or higher is the outlook for US shale oil production. Indeed, these predictions are impressive, but what if the US shale oil production does not reach the expected level?
At least in 2019, pipeline bottlenecks in the Permian basin may limit oil production growth. The pipelines in the Permian Basin are basically fully operational, while Midland crude oil has a large discount. It is unclear how these conditions will work, but if the US shale oil is under-exploited, the market may find a lack of oil.
This is a serious problem when OPEC runs out of a lot of idle capacity. Now increasing oil production can keep the market supply sufficient, but at the expense of idle capacity, and idle capacity may drop to dangerously low levels next year.
Hedge fund manager Pierre Andurand said in an interview earlier this month: "The situation has become interesting. We are in a bull market for several years. We may see oil prices rise to a high of $100 this year. 2020 to 2021 In the year, oil prices may exceed $150."
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