Oil Prices in 2019 and Beyond

Oil is the commodity that, literally, runs modern day civilization. Still very few people, even from the industry, takes the pain to understand how the global oil prices are determined.

So How Oil Prices are determined?

Notwithstanding the common believe, demand and supply alone do not set the global oil prices - geopolitics, global trade wars & regional conflicts have major roles to play.

Another important determinant of global oil price is the fiscal break-even price of oil at the leading exporting bloc.

Organization of Petroleum Exporting Countries (OPEC)

Oil exporting economies rely heavily on oil revenues to cover their fiscal spending. Any analysis of their economy focuses on their fiscal break-even price—the oil price that allows the government's budget to balance.

Break-even oil prices, depending on the fiscal deficits at various oil producers, range between $47 and $216 per barrel.

Venezuela has the highest fiscal break-even at $216, while the lowest is for Qatar at $27. For the largest oil producer Saudi Arabia and Russia, these levels are $88 and $53, respectively. The fiscal break-even prices for the OPEC are $10-15 per barrel higher than those for private oil companies.

Changes in external break-even prices (the oil price that covers the import bill of oil exporting country) have consequences for the geopolitical positions of the major oil exporters.

Sustained low oil prices can make it difficult for government to generate the resources to deliver the services and jobs that help to assure political stability.

Changing Times …

Oil prices hit $80 few month ago and has already eased. It has been a dramatic shift of sentiment in just about a month with traders switching from predicting $100 per barrel oil to fearing another supply glut amid dimming demand prospects. 

OPEC’s sustained oil’s monopoly as a transportation fuel for decades as transportation accounts for 70 percent of oil. 

World largest oil importing countries China and India are already considering forming an “Oil Buyers’ Club” to counter the market power of OPEC. China and India are likely to attract support from Japan and Europe.

Biggest risk for OPEC is that if it increases the oil prices too high, U.S. shale producers will start pumping too much crude, or customers will find substitutes for oil. The US is already the largest producer of crude oil. 

Climate Change & Electric Cars

Right now, transportation sector is undergoing a transition away from oil and toward electricity.

Car sales in China as well as India have slowed this year, hurting fuel demand. 

China, India, Europe and Japan together have the manufacturing clout (they account for 65 percent of the world’s vehicles) and the buying power (they consume 35 percent of the world’s oil) to rapidly replace the internal combustion engine with electric vehicles.

2019 and Ahead …

Now with VAT been introduced across the GCC [UAE & KSA live], which will provide economic relief and reduce further oil price dependency of GCC countries and help to lower their break-even oil price.

Overall, the weighted average fiscal break-even oil price for the GCC has declined steadily.

Saudi Arabia is likely to lower its budget break-even oil price to below $55 per barrel by 2021.

Considering current market demand / supply, US-China trade war, Brexit and upcoming elections in India  & USA, I would predict oil prices to remain between $55 - $65 per barrel for next 3 years.