Drivers of Oil Prices

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BY ELENA KOSOLAPOVA

AZERI OBSERVER STAFF WRITER

Azerbaijan sees economy diversification as one of its main priorities and pays a lot of attention to the development of the non-oil sector. However, it will take time to reach this goal, and in 2018 almost 80 percent of the country’s exports still fell on crude oil, according to the State Customs Committee. So, Azerbaijan’s economy remains highly dependent on oil revenues, and consequently, the level of oil prices. Therefore, the country closely follows developments in the world oil market, which remains more or less stable after the 2014-2015 crisis.

Arthur Berman, an independent United States geological consultant with thirty-seven years of experience in petroleum exploration and production and the director of the Association for the Study of Peak Oil & Gas U.S.A., shares his views with the Azeri Observer Magazine on the prospects of the oil market and gives his forecast for oil prices in the short term.

Question: What will be the main drivers of oil prices in 2019-2020?

Answer: The primary driver of oil prices will be oversupply. Supply is the most common cause of oil price changes. Analysts who emphasize demand fail to understand that demand changes slowly, except for when a major economic collapse occurs, such as in 2008. Supply can change relatively quickly and, to date, there is no evidence for weakening demand. The International Energy Agency’s (IEA) report is confident in a 1.4 mmb/d demand growth in 2019. World prices collapsed in October-December 2018 because of oversupply.

Q.: Do you expect that the crisis in Venezuela will have a significant effect on oil prices?

A.: The effects of Venezuela’s declining production have mostly already been included in market pricing since this crisis has been slow-moving for at least a year. Most of Venezuela’s production is in heavy oil, which is essential for blending with ultra-light U.S. shale oil but is not a huge factor for most of the world outside of the United States. Canada provides an alternative to Venezuelan heavy oil, although much of this oil must be transported to American refineries by rail because of the Keystone XL pipeline’s permitting delays.

Q.: Since early 2017, the OPEC+’s agreement on cutting oil production has helped maintain a balance between oil supply and demand. In your opinion, will the agreement be further extended into 2019?

A.: Yes, I believe that OPEC+’s production cuts will extend.

Q.: International organizations forecast that the United States can overtake Saudi Arabia and Russia in a couple of years to become the biggest crude oil producer. Will shale oil production in the U.S., which is not a part of the OPEC+ deal, rise with the current oil prices?

A.: Tight (shale) oil production is more dependent on the supply of outside capital than on oil price. At some point, the two factors are of course related, but so far, they have been largely disconnected. There is evidence that this may be changing, but there is no clear evidence of a slow-down in production yet. The Permian Basin’s pipeline constraints have received much attention and are very real. At the same time, rail options exist, and production in the Permian Basin continues to increase.

Q.: What is your forecast for oil prices in short and mid-term?

A.: I expect that the Brent price will remain below $65/barrel and WTI will be below $60 for 2019. There may be periods of higher costs based on market sentiment, but I doubt these will last more than a few weeks or months at most. Unplanned supply outages beyond Venezuela, Libya, and other recognized risk factors would change this forecast of course. I cannot forecast beyond 2019 with any certainty, but I don’t identify undersupply factors in the next few years that would put significant upward pressure on oil prices.

*EIA – The U.S. Energy Information Administration