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The rise and fall of oil prices in 2018

Prices rose, Trump hollered, supply signals were mixed, Iran was hit by sanctions and then prices fell back

2018 proved to be another year of mixed fortunes for the oil and gas industry, with prices firming up to levels that were more common pre-2014, before dipping down in November as fears of global oversupply, amid retrenchment in global economic growth, began to kick in.

Nonetheless, for most of the year, the narrative was one of steadily rising prices—sufficient for the ever-voluble US President Donald Trump to make repeated calls for price restraint from Opec. With prices rising in June, Trump tweeted on 13 June that "oil prices are too high, Opec is at it again. Not good!"

Whether good or not, Trump's moves may have had some short-term impacts. On 23 June, an Opec ministers' meeting in Vienna drew a broad commitment to boost production by about 1mn bl/d, despite Iran's evident opposition. The aftermath of the meeting saw a quick increase in supply from Saudi Arabia and its major Opec allies, helping compensate for lower Libyan, Venezuelan and Iranian production.

Saudi Arabia doubled down on the message that it would be responsible and release supplies to make sure that no shortages materialised—and keep the White House occupant away from his Twitter feed. Saudi energy minister Khalid al-Falih highlighted the kingdom's unique position in having all its spare capacity available at short notice. It could, he intimated, pump as high as 11mn bl/d, about 1mn bl/d more than it was supplying for most of the first half of 2018.

Even non-Opec Russia, which until then had largely been in lockstep with the Opec approach, seemed to be changing its tune. Moscow called for an easing of supply curbs amid concerns about the impact of $80/bl-plus prices on global demand.

"Oil prices are too high, Opec is at it again. Not good!"—US President Donald Trump speaks out in June

As ever, politics played a key role in shaping oil markets in 2018. The backdrop to the June Vienna meeting was dominated by accelerating fears that Trump's announcement of the US withdrawal from the Joint Comprehensive Plan of Action (JCPOA) with Iran would result in a much more significant loss of supply than the initial expectations of up to 500,000 bl/d. Inevitably, the market began factoring in a steeper fall in Iranian output in advance of the November 2018 deadline when full sanctions on Iran would kick in again.

With the likes of Venezuela in meltdown, and other Opec producers such as Angola underperforming, the spectre of supply shortages began to spook the market.

All this seemed to set the stage for a substantial release of Opec+ barrels onto the market. According to the Oxford Institute of Energy Studies (OIES), production numbers communicated to the Opec Secretariat revealed that Saudi Arabia started to hike its production even before the June 2018 Opec meeting. Riyadh increased its production to 10.5mn bl/d in June, an increase of almost 500,000 bl/d on the month of May. Saudi exports surged to a 15-month high of 7.5mn bl/d in June, up from 7.15mn bl/d in May, said the OIES.

With more supply coming on stream, consumers prepared for bearish price signals to re-emerge. Yet events over the summer proved that if nothing else, the oil market is never predictable.

The Saudis gave advance warning that the Opec increase's impact would not be felt immediately, even as those who could boost supply did so: UAE production averaged 2.98mn bl/d in July, an increase of 85,000 bl/d from the previous month and 110,000 bl/d more than in May. Another Gulf Opec stalwart, Kuwait, saw crude oil production rise by 80,000 bl/d in July to 2.8m bl/d. Across the border, Iraqi crude oil production hit its highest level in 13 months in July at 4.46mn bl/d. Outside of Opec, Russia ramped up its crude production in July by as much as 250,000 bl/d compared to May levels.

As Schlumberger CEO Paal Kibsgaard noted, these moves only served to highlight a relative scarcity of new supply options. With Libya and Nigeria producing at near-full capacity, Venezuelan production in free fall, the potential of new sanctions against Iran, and rising geopolitical risks, Kibsgaard identified the only major sources of short-term supply growth, to address global production decline and strong worldwide demand, as Saudi Arabia, Kuwait, the UAE, Russia, and the US shale oil industry.

The Saudi kingdom itself showed evidence in 2018 that its overwhelming focus was on finding the hallowed 'goldilocks' pricing point, where it is neither too high that it stimulates alternative fuels and not so low that it is uneconomic in terms of production.

Meanwhile, Iran's exports and production began to wind down over the summer, suggesting pressure from US sanctions was having an effect in advance of the 4 November deadline imposed by the US for sanctions to restart. Iran exported just over 2mn bl/d in crude oil and condensate in August, according to Bloomberg tanker tracking, the lowest since March 2016, and down 28pc from April of this year—the last month before President Trump announced his pull-out from the nuclear deal.

Provisional data for the third quarter of 2018, cited by Riyadh-based Jadwa Investment, showed that crude oil production from Opec members was averaging 32.4mn bl/d in Q3 2018, up by a marginal 1pc in quarter-on-quarter terms. Amid Libyan outages and declining investment in Venezuela, those countries saw continued sizable quarterly declines in Q3 2018.

Over in the US, oil output was moving upwards, hitting 11mn bl/d by late August, putting it in earshot of becoming the world's leading producer. US supply growth is currently faster than at any point during the 2011–15 shale revolution, according to Bank of America-Merill Lynch (BAML) research. It expects US crude oil output to exceed 12mn bl/d by the end of 2019. With Russia pumping 11.2mn bl/d, this milestone should turn America into the world's largest crude producer within the next few quarters, it noted.

Yet by November, much of the bullish dynamic that had characterised the oil market in 2018 had dissipated. The speed of the price decline surprised many, notably the bulls. By 23 November, Brent was trading at just $61/bl, the lowest level since early December 2017. In month-on-month terms, this represented a 30pc fall from the October peak of more than $86/bl. According to BAML, both WTI and Brent crude oil prices are down 26pc and 23pc from their peak in early October following one of the most sizeable oil price corrections in recent memory.

The cause of the price falls was pretty simple: oversupply. Data from the US Energy Information Administration in the third week of November revealed that US crude inventories had gone up 4.9mn barrels from the previous week to 446.9mn barrels, the highest level since December 2017.

The crux of the issue is that world crude inventories were still rising in Q4 2018, even while global supply was rapidly outpacing demand.

Such bearish indicators prompted Saudi Arabia to intervene. In November, Riyadh announced a 500,000 bl/d cut in December supplies in an effort to halt downside losses.

By year-end, even the more bullish market analysts were reassessing their methodologies. But many still viewed it likely that oil would rebound from its late 2018 weakness. The big sell off in November was in large part stimulated by a burst of US supply and favourable market reaction to the US government's issuance of sanctions waivers to eight major importers of Iranian crude. Many were still anticipating an increase in oil prices heading into 2019. Time will only tell if these sages were right.

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