The crude oil market will be more sensitive to shifts in global supply this year, according to the Economist Intelligence Unit (EIU) in its report, Turbulent times: Measuring real-time shifts in a volatile oil market. This increased sensitivity will be due to the clearance of the global oil supply glut – the result of significant cuts to crude oil production by major oil producers. As a result, global oil stocks last year dipped below the previous five-year average for the first time since 2015.
Furthermore, the EIU expects the risks to the global supply of oil to increase, with the following events likely to affect oil exports in the coming year:
- US sanctions on Iran: In the coming months, the level of access Iran will maintain to export markets in Asia will have an impact on political stability. Should Iran’s exports fall below 10 million barrels per week for an extended period, the Iranian government may resort to more aggressive measures in the region. This will create more oil-price volatility.
- Potential production cuts by the Organisation of the Petroleum Exporting Countries (OPEC) and Russia to compensate for Iran: Saudi Arabia claims to be able to moderate oil production but does not appear to have slowed crude oil exports. Russia will struggle to rein in partially private-owned oil producers, so a steady rise of oil export levels is expected. Should they rise too quickly, oil prices may drop further.
- Political instability in smaller oil suppliers: Venezuela’s political landscape and economy are in a state of flux, which has seen its oil output fall to the lowest in decades. In Nigeria, the ongoing presidential race is expected to perpetuate oil-sector militancy. Despite recent improvements in their political situation, Libya’s continued instability will affect their ability to export oil.
Ultimately, the global oil market is becoming increasingly dominated by Russia, the United States, and Saudi Arabia, so actions taken by these countries could significantly influence global supply patterns.
For example, US crude oil production rose by an estimated 14 per cent year-on-year in terms of volume in 2018, with US oil companies remaining prudent in their investments, despite having 138 more oil rigs in operation in 2018 compared to 2017. Should oil prices decline across one to two months, this could lead to lower investment and hence lower production levels. The EIU predicts that US production will rise at a modest six per cent year-on-year in 2019.
In addition to supply-side risks, global oil prices are also susceptible to global demand. The report predicts that global economic growth will slow, especially due to the ongoing trade war between the US and China. With emerging markets in Asia, particularly China, accounting for over 50 per cent of new oil demand in the coming years, oil prices will be highly sensitive to economic performance in the region.