Even that oil prices slightly lost part of their historical price rally the last 9 days, a real bull is currently building up. First signs of a possible Q1 price rally continuation is clear, but most analysis has been only looking at emotions. The threat of a China-US trade war has been taking its toll of crude oil prices the last months, bringing down price levels to the lowest levels in 2018. The first days of January 2019 showed however the re-emergence of hope for a deal between Washington and Beijing, removing fears of a global recession. At the same time, the still low impact of US sanctions on Iran, the fractured internal and global policies of Washington, and fears of slowing demand while storage levels kept going higher, also pushed prices down. All the so-called negative factors however were and still are based on emotions, not supported by real facts on the ground, and an overwhelming flocking behind the idea that US shale oil will push OPEC out of business. The continuation of US shale production increases, combined with US oil storage reports of the EIA and API stating volumes growth for weeks, also almost pushed OPEC, the global oil cartel, over the brink. At least, media and financial analysts were spreading this particular view with vigor. The successful OPEC – Russia meeting in December 2018 in Vienna, Austria, where both parties agreed to a production cut of 1.4 million bpd was seen as one of the last battle cries of the cartel, while a growing amount was doubting the success of the new agreement. Oil prices reacted by sustained losses, threatening a new oil price crash.
Reality however showed already since months a new scenario, in which fundamentals and geopolitical issues were combined to create a bull-market in 2019. Without even doubting the ongoing production increases in US shale oil, the market is heading for supply shortages. The latter seems to be a discrepancy if supply is going to slightly higher than demand, but George Orwell’s theory of Animal Farm, stating “All animals are equal, but some are more equal than others” can be applied here too. All oil is seen as being seen in general as equal, so prolonged or sudden production crisises in one region or country can be mitigated by other producers. Increased US shale oil production would be able to counter falling supplies of Iranian or Venezuelan oil for sure, the majority of media and analysts is reporting. Reality is totally different, all crudes are equal (in the eyes of the media), but some are more equal than others. Quality of crudes are different, removing some crudes from being able to substitute others. US shale oil is at present the main volume growth, even in 2019, but its quality only makes it a suitable source for gasoline and only a small list of other products. Iranian and Venezuelan crudes however are more able to provide almost all products needed, with a wide range of refineries globally able to use them as feedstock. Without finding new non-shale oil producers or additional production increases by OPEC or non-OPEC parties a growing disparity will occur in the market. Total volumes available (OPEC, non-OPEC and US shale) are not representing the amount available to produce what consumers worldwide need. US shale oil already is heading for a major crunchdown, as growing shale oil production doesn’t lead to growing demand internationally. A picture of increased US storage volumes is very possible, as US shale oil will need to stored, while global demand for fuels and products is not able to be met by OPEC and Russia.
Keeping the above in mind, the Russia-OPEC production cut agreement already is put in place, several 100s of thousands of barrels have been taken out of the market. More cuts already are internally discussed inside of OPEC, Riyadh, Moscow and other players. Saudi Arabia also has reduced its crude oil exports to the US, addressing a new approach towards Washington. US president Trump’s tweets to lower oil prices is not met by action anymore. One of the reactions of OPEC’s UAE Minister of Energy Al Mazrouei stated is “we decide our own goals, strategies and volumes….we look at the market, not at presidents”. If OPEC will keep to a full compliance scenario for its production cuts, shortages will be hitting the market asap. Analysts, such as Anas AlHajri, however already warned that OPEC doesn’t have to keep to its targeted 100% compliance the coming months as the call on OPEC crude will increase substantially. If no action is taken, prices will hike even before the summer, some expect. By loosening its own production cut strategy, OPEC and Russia will be able to partly stabilize the market and keep prices at reasonable levels.
Another major issue not yet looked upon at all by analysts is that there are several Black Swan scenarios could be popping up in 2019. The ongoing fracturing of the current international and geopolitical system, which was based on cooperation, international trade and risk mitigation, as provided by the UN, NATO or the US on a global level, has been changed. Some will argue this is due to the “Trumping” of the international system, but this is too easy and not reality. Trump’s current impact is a result of the fracturing of the international socio-economic system, which was guaranteed by the only global power, the USA, able to financially and militarily to control or subdue conflicts and risks worldwide and especially in the MENA region. Since the Obama era the system has been largely undermined, opening up a Pandorra’s Box in which new global power players could (re-) start their power projections worldwide. The re-emergence of a Russian pivotal role in the MENA region, the start of pro-active military power projection strategy of China and the rearrangement of alliances in the Middle East and North Africa (Saudi-UAE-Egypt vs Turkey-Iran-Qatar), shows one potential crisis scenario for 2019 with a direct major impact on oil production, investments and prices.
At the same time, internal instability in Iran, Iraq and Syria continues, while Saudi Arabia still faces some political infighting risks in its Royal Family. A potential power struggle in case of King Salman’s death or illness is still on the table, if Saudi’s Crown Prince Mohammed bin Salman’s powers are undermined. A Saudi Royal power conflict would not only destabilize Saudi Arabia, but also OPEC. Externally it also could have repercussions for Jordan, Bahrain, the UAE and even Egypt. During Gulf Intelligence’s UAE Energy Forum 2019 analysts and regional experts (such as the writer) have been discussing geopolitical issues and the fracturing of the geopolitical regional and global order and its potential fallout. Scenarios with very large Black Swan scenarios have been discussed, necessitating in-depth research and foresighting. Optimism about 2019 could be shattered very soon if one of these scenarios would occur.
The oil market and its main players is most probably entering uncharted waters. New geopolitical alliances are being build, partly based on direct energy -related interests. If the Russia-OPEC cooperation becomes institutionalized, a new kid is on the block. A much stronger oil cartel is ready to take charge, this time able to hide behind the market fundamentals. Production cuts or increases can again be linked to market fundamentals, not threatened by US shale oil expansion. Regional issues could however still threaten the cohesion currently shown. Oil prices, taking out the temporary profit taking moves by hedge and investment funds, will be hitting higher levels, potentially again reaching the US$80 per barrel marks very soon. After that line is breached, OPEC’s version of Star Trek Kirk’s “To Boldy Go Where No-one Has Ever Go” could become reality too, not fiction.