Anticipation of U.S. sanctions on Iran drove oil prices to multiyear highs last month, but the crude being pumped to replace Iran’s supply and easing demand growth from a slowing global economy could push them lower again.
Lower oil prices may be good for U.S. consumers and businesses at a time when inflation is starting to tick up, boosting inflation-adjusted income for households and profit margins for energy-consuming businesses. However, they could sting the nation’s energy producers who have become important drivers of U.S. economic growth.
Early last month, the price of Brent crude, the global oil benchmark, climbed to a four-year high around $86 a barrel. The approach of U.S. sanctions pushed Iranian crude and condensate shipments to 1.76 million barrels a day in October from 2.66 million barrels in June, according to ship-tracking firm Kpler. West Texas Intermediate, the U.S. gauge, hit around $76 a barrel, a near four-year high, as Iranian shipments slipped.
In all, 1 to 1.5 million barrels a day of Iranian shipments are expected to be knocked offline by U.S. sanctions.
But Brent has fallen almost 16% and WTI 17% since early October, plummeting alongside equity markets on concerns about the global economy, trade protectionism and rising interest rates.
In the short term, oil prices will be underpinned by dwindling Iranian supplies. The U.S. is reinstating sanctions on Monday after President Trump’s withdrawal from a 2015 international agreement to ease restrictions in return for curbs to the country’s nuclear program.
The Trump administration has made clear that its goal is to reduce Iranian exports to zero. But the White House has acknowledged that a number of buyers may not be able to go to zero immediately, granting waivers to eight countries to allow them to temporarily continue importing Iranian oil while they work toward switching to other suppliers.
Further out, analysts see pressure on the oil price as the U.S., Russia and Saudi Arabia all increase supply when weakening global economic growth is likely to hurt demand. Rapidan Energy Group forecasts 2.5 million barrels a day of additional global supply in 2019.
“The big unremarked-upon change in oil markets in the last six months has been the supply tsunami that has been building for next year,” said Bob McNally, president of Rapidan Energy Group. “We see next year as very oversupplied, and that’s before we take into account demand risk.”
The U.S. economy is growing robustly, but the rest of the world shows signs of slowing down. In October, the International Monetary Fund lowered its forecasts for global economic growth this year and next, citing trade protectionism and instability in emerging markets. That could ease demand from energy consumers. In an October monthly report, the International Energy Agency revised its 2018 and 2019 demand growth forecasts lower, citing a weaker global economic outlook.
Members of the Organization of the Petroleum Exporting Countries have been pumping near full tilt in recent months to offset losses from the Islamic Republic, the cartel’s third-largest producer. OPEC ally Russia, for instance, has increased its production by 400,000 barrels a day to 11.74 million barrels between May and September, a post-Soviet record, according to the International Energy Agency.
Goldman Sachs predicts that Brent will climb to $80 a barrel by the end of this year, before falling to $60 within two years. The bank forecasts 2019 global oil demand growth slowing to 1.45 million barrels a day from 1.55 million barrels in 2018, as the global economy slows.
“We’re more upside risk near term and more downside risk further out,” said Jeff Currie, global head of commodities research at Goldman Sachs.
A big factor will be increased U.S. production, as the industry sorts out logistical constraints which have made it hard to move American oil, Mr. Currie said.
U.S. oil output is expected to reach record levels this year as shale revolutionizes the industry. By 2022, America is expected to become a net energy exporter, only seven years after Washington lifted a ban on selling U.S. oil abroad. Of the 2.5 million barrels a day of additional global supply Rapidan Energy Group expects in 2019, the majority will come from the U.S. and Brazil.
The Energy Information Administration forecasts U.S. output to rise 10% in 2019 to 11.8 million barrels a day, potentially making it the world’s top crude producer.
On the flip side, further declines in Venezuelan production are expected due to the continuing economic crisis there, while output in Libya and Nigeria is at risk of sudden disruptions amid civil unrest.
Of course, as prices fall, producers could cut supply and send oil prices back up again. Some analysts believe that OPEC could consider cutting output as early as its biannual meeting in December.
Write to Sarah McFarlane at sarah.mcfarlane@wsj.com
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