2018 was one of the odder years in recent oil price memory for several key reasons.
While every year has a quirk or two that could throw off fuel price forecasts, this year seemed to be loaded with them.
We just released our 2019 Oil Market Outlook, which gets into the nitty gritty on trends in futures, spot, wholesale and retail fuel landscapes for oil, gasoline, diesel and more. But, as we look to where we’re going, it’s important to reflect on where we've been.
So, let’s dive right in and see what made 2018 unique.
OPEC+ Decisions, Sanctions and Market Bloat Kept Oil Prices Volatile
When considering 2018 oil market oddities, look no further than the OPEC+ production.
The group started a supply rebalancing act in 2017 and that carried into 2018. And how! The incredible discipline from those in the pact, along with sliding output from members like Venezuela, helped the group “overshoot” compliance goals.
Inventories certainly became balanced, if not tight, and that had some of the agreement’s kingpins pushing for a production increase in the middle of the year. However, that did not necessarily put downward pressure on prices as the increase tightened spare capacity.
Autumn 2018 saw further volatility supplied by geopolitics. Looming sanctions on Iran helped push oil prices to multiyear highs in early October, as Brent moved across $80/bbl.
This fulfilled some market price forecasts, though those levels proved to have little staying power.
Prices dropped sharply from the early October highs to annual lows a little more than a month later. Tight supplies became bloated once again. For example, U.S. crude oil storage levels (as of this writing) sustained a 10-week streak of increased crude oil supplies to the tune of some 56 million bbl. What had been a deficit to the five-year average turned into a supply surplus.
Fast forward to early December and OPEC+ was back to prepping a production cut. Not only did OPEC adjust output levels, but Canada said it was going to curtail production, an unprecedented action from the leadership of Alberta.
Are you looking for even more evidence of a weird year? OPEC member since 1961 Qatar said that it would be leaving the group on Jan. 1, 2019. While Qatar may represent one of the smallest producers in OPEC, the fact that they are leaving the group brings into question the balance of power within the group.
Not only did crude oil have its oddities in 2018, but retail gasoline did as well. Gasoline prices at the pump peaked at $2.9682/gal on May 26, a common date for a retail price top. From there, though, prices were abnormally steady, with no real declines until the calendar was well into autumn months. In fact, for the summer driving season, just 14cts separated the high and low average.
Here are some other things we’ve noticed in the odd year that 2018 has proven to be.
Benchmark Oil Prices Are Likely to Average More in 2018 than 2017
Percentage gains for WTI and Brent crude oil futures prices through the first 11 months of 2018 were stronger than all of 2017. Supplies tightened and demand remained strong.
Through the end of November, the average front-month WTI settlement stood at $66.27/bbl, up 30% year-on-year. The WTI annual average should trickle lower through December, with prices currently in the low $50/bbl area.
One interesting data point from WTI trading in 2018 was that the front-month contract never settled below $50/bbl. A repeat of that is not guaranteed in 2019. Explore more in our 2019 Oil Market Outlook.
In 2017 the percentage gain for Brent (at least through the end of November 2018) outpaced WTI with year-on-year appreciation in the 33% area as front-month Brent averaged $72.87/bbl.
OPIS did anticipate a narrowing of the WTI-Brent spread from the strong levels that ended 2017. The WTI-Brent spread at the end of 2017 stood at around $6.50/bbl. Although the spread spent time in double digits in 2018, Brent has averaged $6.61/bbl more than WTI (front month vs front month with no adjustment for expiration).
Strong demand and tighter global supplies kept Brent well supported, while bottlenecks in the U.S. kept the WTI futures market from expanding like Brent did.
The Long, Difficult and Choppy OPEC+ Rebalancing Is Progressing
Oil supplies became balanced as OPIS had suggested in 2018, with supplies tightening in the second quarter leading to a production increase from the OPEC+ group.
The baseline has changed in determining if supplies are tight or not. The modern version of supply tightness may be when total crude oil inventories drop below 400 million bbl and minimum operating levels might be closer to 350 million bbl.
And larger numbers make sense as the growth of pipelines, storage and other infrastructure buildups coincide with the increase in oil production.
2018 Saw the Highest U.S. Oil Production
At the beginning of the year, OPIS anticipated the highest-ever production figure was on deck in 2018. U.S. oil production was expected to hit double digits and OPIS expected total output hitting double digits before the end of the first quarter this year.
According to the EIA, average production first hit the 10-million-b/d mark in November of 2017 (when the market was still assuming that production was below 10 million b/d as monthly figures were not yet available) and production has almost been on a straight line higher.
Many analysts thought that 10.5 million b/d was a strong target for year-end output, but production has cleared 11 million b/d and any upward momentum for oil prices may indeed make 12 million b/d a reasonable production goal early next year – a level that at one time was considered either a pipe dream or something reserved for a post-2020 world.
With that being said, there’s a very good chance that the all-time highs for U.S. production are still on deck.
Oil Futures Market Breadth and Participation
Oil has indeed become an asset class. OPIS had expected record volume and open interest for futures this year.
Let’s take a look at the scorecard…
ULSD was the first to hit a new open interest milestone. On Jan. 26, total open interest for the contract associated with diesel fuel prices was near 500,000 contracts. WTI and RBOB established new benchmarks later in the spring. WTI total open interest near 2.714 million lots represented a new all-time high as of May 16. Meanwhile, RBOB peaked at just over 501,000 total contracts on May 22.
What may be most interesting is that those records may be around for a while. Heading into the home stretch of 2018, total WTI open interest has struggled to stay over 2 million contracts, while RBOB and ULSD have slumped well below 400,000 lots.
While no new volume records were established in 2018, overall volumes were strong. In the case of ULSD, eight of the top 10 most active trading days took place this year, however only one session in 2018 was found in the top 10 for RBOB since 2015. Over the past four years, half of the 10 highest volume sessions for WTI landed this year.
Retail Gasoline Prices Were Stronger in 2018
Retail gasoline prices will ultimately be higher than what OPIS had forecast due to very little summer decline and a late peak for crude oil.
At the mid-point of 2018, OPIS analysts expected U.S. retail prices to average $2.77/gal for the second half of the year. Currently, the second-half average is around $2.80/gal and, with prices tiptoeing lower, the last six months of the year will end close to the OPIS outcome.
A Sneak Peek at 2019
With 2018 just about wrapped up, will 2019 fall into a more traditional year?
Chances are that it won’t, as there are just too many moving pieces that will keep industry players on their toes.
Demand growth, production growth, the potential for an economic slowdown, geopolitics and an unpredictable U.S. president will all be factors that will shape prices next year.
Throw in the International Maritime Organization’s 2020 fuel specifications change and that leaves the potential for a year that would make Dr. Jekyll and Mr. Hyde proud.