Energy Sector Predictions For 2019
As we begin 2019, the energy markets and the stock markets are experiencing extreme volatility. Both underwent steep declines during the latter part of last year, but both are off to a fast start in the new year.
How might this all play out in 2019?
Below are my predictions for the significant energy trends I expect this year. As I often point out, the discussion behind the predictions is more important than the predictions themselves. That’s why I provide extensive background and reasoning behind my assertions.
I also provide predictions that are specific and measurable. At year’s end, certain metrics will indicate whether a prediction was right or wrong.
These predictions matter to your overall investment decision-making this year, because the movement of oil and gas prices can exert a profound influence on your portfolio.
1. Oil prices will rise at least $25 per barrel in 2019.
Six months ago, when oil prices were pushing above $70/bbl, I thought the price rise would slow heading into 2019. I didn’t foresee the collapse in prices that took place in the second half of 2018.
President Trump has taken credit for lower oil prices, and indeed he did have an impact. The trade war prompted China to stop importing U.S. oil, which caused domestic inventories to start rising. Oil prices lurched downward as a result.
Then, Trump convinced Saudi Arabia to increase oil production to make up for oil exports that would be lost because of Iranian sanctions. But at the last minute, the Trump administration granted generous exemptions to allow countries to continue importing Iranian oil. These exemptions are supposed to be for 180 days, but they suddenly created too much oil in the market.
Saudi Arabia was furious and immediately cut oil production. At the next OPEC meeting, the cartel agreed to cut production to balance the market. Now the Wall Street Journal is reporting that Saudi Arabia slashed production by even more than expected and is targeting $80/bbl this year. I don’t think it will get that high.
However, the U.S. Energy Information Administration projects that West Texas Intermediate (WTI), the U.S. benchmark, will average $54/bbl in 2019. I think that’s too conservative. I expect that by the end of the year, OPEC’s strategy will be working, and you will see oil prices get back to the $70/bbl level.
2. U.S. oil production growth will slow in 2019 versus 2018.
Except for an OPEC-induced dip in production in 2016, U.S. oil production has risen like a rocket since 2011. None of those years was bigger than 2018, when domestic oil production rose by 1.5 million barrels per day (BPD). In the six of seven years since 2011 when production did increase, it rose by an average of one million BPD.
While I do expect U.S. oil production to grow again in 2019, the combination of lower oil prices to begin the year and a potential economic slowdown stemming from trade tensions should result in a slowing of production growth for 2019.
However, average production for all of 2018 was 10.9 million BPD. By the end of the year this level had reached 11.7 million BPD. Thus, it won’t take much of a rise to add another average of one million BPD to 2018 levels. I believe this will happen, but I don’t believe we will add a million BPD from the year-end level of 11.7 million BPD (as we did in 2018).
We need to do is sustain another 300,000 BPD in 2019 to year-end 2018 levels to average a million BPD over 2018. I can see that happening, but not a repeat of 2018’s huge growth.
3. Despite President Trump’s best efforts, gasoline prices will end the year at least $0.30/gallon higher than they began the year.
I typically make a natural gas prediction, but the fundamental picture is mixed. Inventories are still extremely low, which should call for higher prices. But natural gas prices are quite low to start the year. If the inventory picture improves, they will stay low. If not, we will see a lot of volatility. It’s a coin flip, so I will forego a natural gas price prediction this year.
But here’s one where I think the picture is clearer. On New Year’s Day, President Trump tweeted:
Gasoline prices have fallen sharply because oil prices have collapsed. President Trump did influence that by conning Saudi Arabia into increasing production and then letting Iran continue to export oil. This prediction is related to my oil price prediction, but I expect that gasoline prices will end the year significantly higher than they began the year. Further, December gasoline prices are usually low, because seasonal demand is low (and it’s cheaper to produce winter gasoline).
The price of WTI averaged $65.23/bbl in 2018. Given that we are starting the year nearly $20/bbl below that price, I think it’s unlikely that the 2019 average will top that. In turn, I don’t think the national average 2019 retail gasoline price will top the 2018 average price of $2.81/gallon. But I do think gasoline prices are going to rise well above the year-end price of $2.36/gallon.
On the flip side, U.S. gasoline inventories are currently high, which will provide headwinds for a while with respect to gasoline prices. They only reached $3.00/gallon during two weeks in 2018, and there is a good chance they won’t reach that level at all in 2019. It hinges on how quickly oil prices make a move higher.
We will see a gasoline price spike this year, albeit not as high as in previous years. However, we don’t normally see year-end gasoline prices rise by at least $0.30/gallon higher than the previous year. It has only happened once since 2010, but I predict it happens again this year.
4. The diesel premium over gasoline will at least double in 2019.
One issue that hasn’t gotten nearly enough attention are the consequences of a pending deadline that will impact the fuel markets. On January 1, 2020, the International Maritime Organization (IMO) will require the sulfur content in marine fuel to drop from a maximum of 3.5% down to 0.5%. The result is likely to be a spike in the price of low-sulfur marine fuels, which will likely affect several types of fuel. Prices for low-sulfur crude oils will likely expand their premium over high-sulfur crudes, which will probably make diesel more expensive compared to gasoline.
As I pointed out in a previous article, the U.S. began to phase in ultra-low-sulfur diesel (ULSD) in 2006. In the decade prior to the implementation of ULSD, retail gasoline traded on average at a $0.04/gallon premium to retail diesel. In 2005, the year before the phase-in of ULSD began, diesel traded at an average of $0.09/gallon over the price of gasoline. And in the decade following implementation, diesel averaged $0.23/gallon over the price of gasoline.
In 2018, retail diesel prices averaged $3.18/gallon, a $0.37/gallon premium over gasoline. I expect that premium to reach $0.75/gallon in 2019, as suppliers scramble to comply with the new guidelines. However, one wildcard may impact this prediction: the new rules could be postponed to allow more time for compliance. I don’t think that’s likely, but it is possible.
5. Solar sector equities recover by at least 20%.
As we begin the new year, significant disconnects exist in the energy markets. Master limited partnerships (MLPs), for instance, are trading far out of sync with the underlying fundamentals, and as a result I expect them to outperform in 2019.
But the largest disconnect is in the solar sector. Concerns about the impact of trade wars and tariffs have negatively impacted sentiment in the solar sector. This resulted in a significant decline in solar stocks in 2018. The MAC Global Solar Energy Index Total Return Index (SUNIDX) is a diversified exchange-traded fund (ETF) that is traded on the New York Stock Exchange. The index covers all major solar technologies and includes companies from around the world. In 2018, it saw its value decline by nearly 30%.
Meanwhile, China’s solar panel exports soared by 66% in the third quarter year-over-year, and numerous countries continued to install record levels of solar power. Costs for solar photovoltaics are in long-term decline, mitigating part of the tariffs that the Trump administration imposed in 2018.
Despite the negative perceptions of 2018, investors will again conclude that the future is very much about solar power. The growth rates in the industry are on track to be phenomenal. I predict that solar equities, as represented by the SUNIDX, will rise by at least 20% in 2019.
Trying to divine the future course of the energy industry is important for your investment planning. Energy’s share of business sector U.S gross domestic product comes in at nearly 6%. What happens in the energy patch affects all investors.