As 2018 comes to a close, it's time to review the top energy stories of the year. For the oil market, 2018 has been a roller coaster ride. Ups and downs are always expected, but the twists and turns seen this year were exceptional by any standard.
The price of West Texas Intermediate (WTI) opened the year at $60/bbl. Brent crude was just under $67/bbl. By early October 2018, on the back of several developments, WTI was closing in on $80/bbl and Brent was above $86/bbl. But then prices collapsed in part because the ongoing trade war with China caused them to stop importing U.S. oil, and in part because sanctions on Iranian exports were waived at the last moment -- after Saudi Arabia had already increased production to compensate for Iran's lost exports. The overall impact was a collapse in the price of oil. As we head into the last week of the year, WTI has fallen to $45/bbl and Brent crude is at $54/bbl.
Adding to the above, Venezuela's oil production continued to plummet, as its economy sunk deeper into crisis. By November 2018 it had fallen to 1.137 million bpd -- a decline of nearly 50% since 2016. Continued declines will threaten Venezuela's status as a crude oil exporter, putting further pressure on the country's economy.
Following OPEC's 174th (Ordinary) Meeting in June 2018, the cartel announced, in agreement with Russia, that it would increase production for the first time since implementing production cuts in November 2016. This news was a response to oil prices that had recovered back to the $70/bbl range. But a trade war between the U.S. and China began to raise concerns about demand growth. Then in December 2018, following the oil price collapse in the fall -- which was aided by Saudi Arabia accommodating President Trump's request that they increase production -- OPEC and its allies agreed to cut oil production by 1.2 BPD.
Io the other hand, Natural gas prices break out
After spending the past four years almost exclusively below $3 per million British thermal units (MMBtu), it was clear in August that low inventories could cause prices to spike. Indeed, over the next three months, natural gas futures rose by 60%, and set a monthly average above $4/MMBtu for the first time since 2014.
The outlook at the beginning of 2019 is set to look dramatically different than it did a year earlier. Oil prices are low and demonstrating extraordinary weakness. A year earlier the market was gaining strength for the first time in years. The global economy is currently souring instead of gaining strength. No doubt many of the forecasts being formulated today will be proved wrong, perhaps wildly off base, by the end of 2019. This fluctuation in prices and gains and losses may cause de-investment in the energy industry or in a worst case scenario, the occurrence of wars between countries.