Over the past year or so, forces beyond the ‘traditional’ factors have been at play in oil market dynamics. The latest is the potential knock-on effect of aggressive trade tariffs being slapped onto China, the world’s largest energy consumer and manufacturer. The motivation behind the move, according to US President Donald Trump’s administration, is to counter its trade deficit with China. In response, China has targeted rising US oil imports for duties.

The result of such disputes could threaten nearly $1bn in monthly US crude sales to China, leading one energy market observer to say: “With Trump’s politics, we’re in a world of realigning alliances. China will not just swallow US tariffs.”

On the other hand, this could create an opening – in the short to medium-term at least – for Opec producers to plug a potential shortfall in Chinese oil demand. This comes at the same time as Opec producer Saudi Arabia and non-Opec Russia indicated ahead of the oil group’s 22 June meeting that they will seek to nudge Opec to increase production by 1.5 million barrels a day (b/d) in the third quarter of 2018.

Temporary stability

Given this backdrop, the production hike has the potential to provide market stability, even if it is only short-lived as producers of cheap US shale oil — especially from the prolific Permian region in west Texas — seek better returns overseas and create downward pressure on global oil prices.

This might well chime with the US Energy Information Administration’s latest short-term forecast, which sees much of the predicted 210,000 b/d growth in worldwide oil production in 2019 coming from the US. In June, it calculated Brent crude would average $71 a barrel in 2018, dipping to $68 in 2019, based on global oil inventories rising “slightly” in the second half of 2018 and into 2019.

It is worth also considering a few other factors. While Canada and Brazil are expected to also see significant growth in oil output next year, Opec producers Venezuela and Iran could drag down the group’s total output for 2019.

Venezuela is suffering from a combination of mismanagement of its oil industry, missed payments to service providers and a sharp decline in active rigs, among other issues, while Iran is under pressure from fresh US sanctions targeting its energy-producing sector, following the Trump administration’s unilateral withdrawal from the Joint Comprehensive Plan of Action. The extent to which these sanctions will affect Opec’s output was still an unknown quantity at the time of going to press with this report.

This article is extracted from a report produced by MEED and Mashreq titled The Future of Middle East Energy. Click here to download the report