Energy Commodities Price Outlook

Uncertainty in the oil market drags on energy prices

The rally in oil prices in March, April and May came to an end in June, sending prices for oil and its derivatives down. Energy prices fell 1.8% month-on-month in June (May: +5.5% month-on-month), which represented only the second drop in prices in one year. The previous decrease was recorded in February in the wake of a major rout in global equities.

Political developments led the evolution of oil prices in recent weeks. The announcement by Russia and Saudi Arabia in late May that they were ready to pump more oil to cope with declining production in Libya and Venezuela, and in anticipation of supply shortages from Iran due to the reimplementation of the U.S. sanctions, helped alleviate concerns about undersupply. This trend was reinforced on 23 June when OPEC and non-OPEC countries participating in the oil cap deal decided to reduce their compliance level to the accord from around 150% in May to 100%, a measure that would imply an injection of around 700,000 barrels per day. Since late June, however, prices have moved sideways. Saudi Arabia agreed on 30 June to boost oil supply by an undisclosed amount—analysts expect an addition of up to 1 million barrels per day. In response to the U.S. threat, Iran stated that it will close the Strait of Hormuz, a checkpoint of around one-third of the world's oil traded by sea, pushing up oil prices. This situation in the oil market reverberated across oil derivatives such as gasoline and gasoil.

Meanwhile, natural gas prices are benefiting from the ongoing transition towards cleaner-burning fossil fuels. Prices for natural gas, along with other fossil fuels such as coal, are also being supported by hot temperatures in China and the United States.

Despite rising uncertainty, prices for oil and oil-related products are expected to increase this year, driving most of the gains in energy prices. Conversely, stricter environmental regulations will likely hit demand for coal. Analysts surveyed by FocusEconomics expect energy commodity prices to rise 18.7% year-on-year in Q4 2018. Next year, our analysts expect energy prices to decline 2.2% in Q4 2019, mostly reflecting lower oil prices due to increased supply and a broader preference for cleaner energy globally.

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