Grading Our 2019 Energy Sector Predictions
At the beginning of each year, I make several predictions about the energy sector for the upcoming year. You can see those predictions and read the context at Energy Sector Predictions For 2019.
There’s still a holiday-shortened week left in 2019, but we possess enough available information to gauge the accuracy of these predictions.
As always, I provided predictions that are specific and measurable. Following each prediction, I discuss what actually happened in 2019, and conclude whether the prediction was right or wrong.
1. Oil prices will rise at least $25/bbl in 2019.
According to data from the Energy Information Administration, the price of West Texas Intermediate (WTI) closed the last day of 2018 at $45.15/bbl. Brent closed the year at $50.57/bbl.
WTI traded at its highest value of $66.24/bbl on April 23. That represented an increase of $21.09/bbl over its December close. It never traded lower this year than the December close from last year.
Brent also traded higher than its December 2018 close all year, and reached its highest point of $74.94/bbl on April 25. Thus the largest gain of the year was $24.37/bbl for Brent.
As I indicated, we opened the year with bearish sentiment in the oil markets, which largely persisted all year. In fact, sentiment was so bearish that not even the September attacks on Aramco’s infrastructure made a meaningful impact on oil prices. Notably, that wasn’t even when oil prices reached their maximum value for the year.
Even though there are several trading days left in the year, crude prices are about 10% below their highs for the year. It seems unlikely that prices will reach $25/bbl higher than they closed last year. But they got pretty close. The price of WTI reached 84% of that value, while the price of Brent reached 97.5% of that value.
Verdict: Wrong, but close.
2. U.S. oil production growth will slow in 2019 versus 2018.
This seemed like a safe prediction to me. U.S. oil production rose by 1.5 million barrels per day (BPD) from 2017 to 2018, well ahead of most years during the shale boom.
In fact, there was a considerable slowing in the summer, when it appeared that growth was reaching a plateau. But growth picked back up in the second half of the year. Oil production is currently 1.2 million BPD higher than it was at this time in 2018.
For all of 2018, oil production averaged 11.0 million BPD. This year’s average through mid-December is 12.3 million BPD. Thus, 2019 growth is unquestionably lower than 2018 growth, albeit higher than I expected it would be.
3. Despite President Trump’s best efforts, gasoline prices will end the year at least $0.30/gallon higher than they began the year.
This prediction was sparked by a January Tweet from President Trump taking credit for lower gasoline prices. As I have argued here many times, during the terms of multiple presidents, a president generally has minimal impact on gasoline prices. Over the longer term, they can pass policies that impact gasoline prices, but short-term fluctuations aren’t something a president can influence by much.
As I indicated when I made the prediction, I thought it would be unlikely that the national average 2019 retail gasoline price would top the 2018 average price of $2.81/gallon. But my prediction was that gasoline prices would end 2019 at least $0.30/gallon higher than the year-end 2018 price of $2.36/gallon.
So where are we? The average price of gasoline for the year through mid-December is $2.69/gallon, as I expected lower than 2018’s average.
The current average price of gasoline is $2.63/gallon, which is $0.27/gallon higher than it was at the end of 2018. The average over the past month is $2.66/gallon, exactly $0.30/gallon higher than we ended 2018.
This predicti0n is just close enough to say it could go either way. If prices rise by $0.03/gallon in the next 10 days, this one will be accurate. In three of the last four years, gasoline prices did rise during the last week of the year.
Verdict: Too close to call, but in any case the final number will be close to what I predicted.
4. The diesel premium over gasoline will at least double in 2019.
This may have seemed like an odd prediction. I made it because of the new rule from the International Maritime Organization (IMO) that requires the sulfur content in marine fuel to drop from a maximum of 3.5% down to 0.5% on January 1, 2020.
It was questionable whether the world would be able to meet the demand for the low sulfur fuel, but there is some relevant history to consider.
As I pointed out in a previous article, the U.S. phased in ultra-low-sulfur diesel (ULSD) starting in 2006. In the decade following implementation, diesel flipped from trading at a discount to gasoline to a $0.23/gallon premium over the price of gasoline.
As I mentioned when I made the prediction, one wildcard would be if countries asked for more time for compliance. In October the Wall Street Journal quoted a White House source as saying the U.S. would attempt to “mitigate the impact of precipitous fuel-cost increases on consumers.” The markets reacted immediately to that story, as the gap between high and low sulfur fuels tightened in response.
So where do we stand? In 2018, retail diesel prices averaged $3.18/gallon, a $0.37/gallon premium over gasoline. I expected that premium to reach $0.75/gallon in 2019, but the highest level it reached during the year was $0.68/gallon. Further, the gap trended down all year long.
As the year comes to a close, the average diesel premium over gasoline has been $0.36/gallon, a penny cheaper than in 2018. The current premium is $0.42/gallon, which is a nickel more than last year’s average.
In any case, this was a clear miss. My interpretation is that suppliers didn’t have as many problems as anticipated in meeting demand for the new low-sulfur fuel. It could be that fuel consumers have been stockpiling the fuel, and that we may see this premium open up next year. But right now, this one is a miss.
Verdict: Totally wrong.
5. Solar sector equities will recover by at least 20%
I believed that we began 2019 with a solar energy sector that was significantly undervalued. Concerns about the impact of trade wars and tariffs were negatively impacting sentiment in the solar sector. That resulted in a significant decline in solar stocks in 2018.
The MAC Global Solar Energy Index Total Return Index (SUNIDX) is the tracking Index for the “Invesco Solar ETF,” which is an exchange-traded fund (ETF) that trades on the New York Stock Exchange. In 2018, it saw its value decline by nearly 30%. I predicted that this index would rise by at least 20% in 2019.
SUNIDX closed 2018 at $88.48 per share. As I write this, the last closing on December 20 was $146.18, a gain of 65%.
As I expected, investors concluded that the future is very much about solar power, and the negative perceptions of 2018 would mostly disappear in 2019.
Prediction: Accurate, but in hindsight not aggressive enough.
Four of five predictions were either accurate or mostly accurate. The one that missed was way off. The two that were 100% correct were that shale oil production would slow, while at the same time solar equities would bounce back strongly from a downturn in 2018.
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