PETROANALYSIS || ARTICLE
Oil in 2018: Prices, fundamentals, geopolitics and financials markets (Part One)
So far in 2018, oil prices have shown a clear upward trend, advancing on average above 30% compared to 2017. Since 2016 West Texas Intermediate (WTI) has gained 55% until mid-October 2018, while Brent has risen 63%, the OPEC basket 74% and Oman/Dubai 70%, in this period respectively.
There are several reasons that may explain the aforementioned rise. Among these, we can find fundamental elements associated with the relationship between the demand and supply of crude, geopolitical factors and the behavior of investors in financial markets. Here we will evaluate some of them.
1. Fundamentals of the physical market.
1.1. Strength of demand.
The first element that we must highlight is the solid increase that has been evidenced by the demand for crude oil in 2017 and in 2018, which has reached more than 100 million barrels per day (mbd) for the first time in the series. In fact, oil purchases grew 3% since 2016, close to 3 mbd and stood at 101 mbd in August 2018, its highest level in history.
In this sense, the stable expansion recorded by global activity, according to the World Economic Outlook (WEO) report prepared by the International Monetary Fund (IMF), could support the increased demand for crude oil. With regard to this, the aforementioned document states that global activity grew 3.7% in 2017, its largest variation since 2011, and would remain in 2018 and 2019 (3.7%, respectively). Much of the demand comes from advanced countries, which are showing growth above their potential in 2017 and 2018. Meanwhile, emerging and developing nations, particularly those in Asia, led by China and India, eager oil buyers have vigorous expansion rates, which raises their energy needs.
In this frame of reference, the Organization of Petroleum Exporting Countries (OPEC) in its Monthly Oil Market Report (October 2018) informed that the demand for crude increased 3.3% between 2016 and 2018, equivalent to 3.2 mbd in that period. In fact, the solidity of the growth in demand makes OPEC anticipate that crude purchases will rise by 14.5 mbd annually and reach the figure of 111.7 mbd in 2040.
1.2. Oil supply.
The supply of oil grew 1.7%, to a lesser extent than the demand (2.8%), in the period January 2016 – August 2018. This was in response to the higher pumping of non-OPEC countries and in particular the United States. In this period, OPEC decreased its production by 0.4%, due to the huge production collapse in Venezuela, while non-OPEC increased its participation by 4.1%. The latter, in response to the productive phenomenon of shale in the United States, which has seen its production increase by 15.6% (2.3 mbd) since 2016.
So far in 2018 (January-August), crude oil extraction rose 1.5%. Non-OPEC nations contributed 2.7%, of which the United States grew by 10.1% (equivalent to 1.6 mbd), while OPEC registered a contraction of 0.5%, which was explained exclusively by the collapse that Venezuelan production experienced. Since 2016, this country has stopped producing close to 1 million barrels per day.
• International Monetary Fund (IMF).World Economic Outlook (WEO), October 2018.
• Organization of Petroleum Exporting Countries (OPEC). Monthly Oil Market Report, October 11, 2018.