HH My Energy Sector Predictions For 2019

As we begin 2019, the energy markets and the stock markets are experiencing incredible volatility. Both underwent steep declines during the latter part of last year, but both are off to a fast start in the new year.

How might this all play out in 2019?

Below are my predictions for some of the significant energy trends I expect this year. As I often point out, the discussion behind the predictions is more important than the predictions themselves. That’s why I provide extensive background and reasoning behind the predictions.

I also provide predictions that are specific and measurable. At year’s end, there are specific metrics that will indicate whether a prediction was right or wrong.

1. Oil prices will rise at least $25/bbl in 2019

Six months ago, when oil prices were pushing above $70/bbl, I was preparing to make a more conservative oil price prediction for 2019. I thought the price rise would slow heading into 2019, but what I didn’t foresee was the collapse in prices that took place in the second half of 2018.

That collapse in oil prices makes this prediction a lot easier. The price of West Texas Intermediate (WTI) closed the last day of 2018 at $45.15/bbl, after falling $30/bbl in the last three months of the year. Oil closed $15/bbl lower than it opened the year. Meanwhile, U.S. crude oil inventories are almost exactly where they were a year ago.

The difference is in the perception of where the oil market is going. Market bears foresee electric vehicles taking a larger bite out of oil consumption, and they see continued growth of U.S. oil production contributing to an oversupply of crude oil globally. They are also concerned about an economic slowdown.

OPEC is the wild card here. A big reason oil prices collapsed is that President Trump convinced Saudi Arabia to increase production to make up for oil that would be lost as a result of Iranian sanctions. But at the last minute, the Trump Administration granted generous exemptions to allow countries to continue importing Iranian oil. These exemptions are supposed to be for 180 days, but they suddenly created too much oil in the market.

Saudi Arabia was furious, and they immediately cut oil production. At the next OPEC meeting, the cartel agreed to cut production to balance the market. I expect they will have success with this strategy in 2019, the same way they did the last time they went down this path. OPEC hasn’t lost its pricing power yet, as long as they maintain discipline. I expect their previous success will be repeated this year. The U.S. Energy Information Administration projects that WTI will average $54/bbl in 2019. I think that’s too conservative.

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Moon Kil Woong 10 months ago Contributor's comment

I am not bullish on natural gas, but I am positive on oil demand. As for oil prices, I expect a gradual rise but nothing significant with potential downward shocks on the way. The simple fact is, there are too many companies with shaky finances in oil right now.