With the Federal Reserve raising rates in 2018 and speculation of doing so again in 2019, combined with projected oil production cuts by Russia and Saudi Arabia, it is likely that these and other global events will impact world energy markets in 2019.
Looking at how international markets have priced crude oil in 2018’s fourth quarter, there's a lot to speculate on where prices will go in 2019. During the final quarter of 2018, oil prices hit a 48-month high of $86 per barrel. Yet, by the end of December, the price of a barrel of oil lost almost one-third of its value, settling under $50 per barrel. Since the global economy is so volatile and is forecast to continue this way, oil prices will likely follow.
Along with protests in Iran from 2018 that have continued into 2019, creating political unrest, the current U.S. Administration has reinstituted the oil embargo it put in place. With the United States formally withdrawing from the 2015 nuclear agreement and reapplying sanctions as of Nov. 5, 2018, sanctions against importing oil from Iran were also enacted.
Instead of simply cutting off oil imports from Iran immediately, it gave eight nations (India, Italy, Greece, Turkey, Taiwan, Japan, South Korea and China) 180-day waivers to put in place contingency plans to gradually stop imports from Iran before oil imports from the Islamic Republic are penalized. This action is part of a larger act by the U.S. Administration to reduce oil exports by Iran, impacting global crude oil prices.
As Secretary Pompeo has cited, more than 20 nations have stopped Iranian oil imports, leading to 1 million fewer barrels of crude oil off the market daily. This also cut off profits for Iran's oil revenue, with the nation losing $2.5 billion since May 2018. As for overall production figures, consulting firm Wood Mackenzie reports that Iran's oil exports dropped from 2.8 million barrels a day in April 2018 to 1.8 million barrels per day recently. Analysts estimate the current trends will lower Iran's exports to 1 million barrels per day.
When it comes to forecasting 2019’s crude oil production, the outlook is similarly in flux. There is speculation that more details will be released on the level of production cuts on March 17, during an OPEC meeting that will include other global producers such as Russia.
As part of the OPEC meetings, an agreement for the first half of 2019 is to lower production by 1.2 million barrels a day. Members meeting this lowered production goal will be evaluated during OPEC’s Joint Ministerial Monitoring Committee in Vienna on April 17 and 18. This April meeting will determine how production cut efforts are going and if such cuts should extend into the second half of the year.
One ancillary but important factor for the world oil market is the U.S. dollar. With the Fed revising its average growth forecast down for 2019, from 2.5 percent to 2.3 percent, the consensus is for the Fed to increase the Federal Funds Rate twice, and not the projected three times. With the U.S. dollar strengthening and the commodity priced in dollars, based upon these projections, prices can be expected to drop.
The current world economic situation not only directly impacts oil prices, but it also gives insight as to the globe's economic health. Whether it be uncertainty about the Fed's decision to hold off or lessen its interest rate increases, the back and forth trade negotiations between the United States and China, or the developing situation in Venezuela with Russia becoming friendlier and Maduro recently giving U.S. diplomats 72 hours to leave, the only thing that's for sure is market and price volatility.