U.S. Markets closed

Here's What Investors Can Expect From Oil Prices in 2019

Matthew DiLallo, The Motley Fool

Oil prices put on quite a show in 2018. Crude started the year in the $60s after OPEC stuck to its plan to hold supplies back from the market and prop up prices. Oil would go on to rise nearly 30% from that starting point after the Trump administration threatened to impose powerful sanctions on Iran, which fueled worries that oil supplies would fall short of demand. That caused OPEC to hike its output by midyear so that oil prices didn't run too hot. The government, however, ended up granting waivers to many of Iran's key buyers, which quickly erased market worries of a supply crunch and replaced them with fears of an impending glut.

That caused oil prices to tumble back toward $50 a barrel, putting them down by double digits for the year by mid-December. This slump has put a damper on the expectations for oil prices in 2019, which was evident in the latest short-term energy outlook by the U.S. Energy Information Administration (EIA). Here's a closer look at what the EIA expects for the coming year and what that means for investors.

An offshore oil production platform at sunset.

Image source: Getty Images.

Drilling down into the EIA's 2019 forecast

The EIA's latest oil market outlook anticipates that the global oil benchmark, Brent, will average $61 a barrel in 2019. Meanwhile, it sees WTI, the U.S. oil benchmark, averaging about $54 a barrel next year. Both prices are about 15% lower than its last outlook in November, which shows just how quickly sentiment has changed and how fast it could shift course in the coming year.

One of the factors that will likely weigh on oil prices in the new year is the EIA's view that global oil production will outpace consumption for the first half of the year.

A chart showing world production and consumption over the past few years.

Overall, the EIA sees oil supplies rising by about 1.4 million barrels per day (BPD) in 2019, fueled in large part by the U.S. where output should average 12.1 million BPD, up from a record 10.9 million BPD in 2018. Partially offsetting this surge in U.S. output will be less production from OPEC -- which agreed to cut its supplies starting in January -- as well as from Canada.

Demand, in the meantime, should expand by roughly 1.5 million BPD in the EIA's view. However, that growth won't begin offsetting anticipated supply until the third quarter of 2019 since producers are currently pumping out more oil than the market needs. Because of that, oil prices could continue making wild swings in the coming year.

What this forecast means for oil stocks in 2019

If the EIA is correct, then oil prices could be under pressure for the next several months before potentially rebounding in the second half. The potential for lower prices in the near term could impact oil stocks that aren't able to weather sub-$50 oil. That's why investors should focus their attention on those that can easily handle lower oil prices.

A drilling rig near some oil pumps with a nice sunset in the background.

Image source: Getty Images.

Occidental Petroleum (NYSE: OXY), for example, had spent the past several years resetting its business so that it could maintain both its production rate and its high-yielding dividend on the cash flows it can generate on $40 oil. As a result, Occidental can thrive at higher oil prices, with it currently on track to grow production at a 5% to 8% annual pace on $50 oil. And with $3 billion in cash in the bank, Occidental Petroleum has a nice cushion to see it through a period of lower prices, while giving it the funds to take advantage of opportunities that may arise such as acquisitions or buying back its stock.

ConocoPhillips (NYSE: COP) also reset its business based on lower oil prices. The company currently can generate enough cash flow at $40 oil to fully fund its $6.1 billion expansion plan in 2019 with money left over. Add those funds to the $4.8 billion in cash ConocoPhillips has on its balance sheet, and it has the financial resources to pay its dividend, buy back $3 billion in stock, and grow production at an 8%-per-share rate in 2019 even if oil prices tumble in the next year.

Anadarko Petroleum (NYSE: APC) can also weather any storms in the oil market during 2019. The company set its budget for the coming year based on $50 oil, which would enable it to generate enough cash to invest $4.3 billion to $4.7 billion into new wells that should grow its oil production 10% in the coming year. With roughly $4 billion of cash on its balance sheet, Anadarko Petroleum also has plenty of cushion, which is why it's planning to repurchase another $1.5 billion in stock by the middle of 2020 while also paying a much higher dividend.

The future doesn't always follow forecasts

The EIA currently expects oil prices to remain under pressure in 2019 because the world is producing more oil than it needs, even with the recent production reduction announcements from OPEC and Canada. That situation doesn't appear as if it will improve until the second half of next year.

However, while that's the current expectation, several things could impact oil next year. For starters, a slowdown in the global economy could hurt demand while a natural disaster, terrorist attack, or mechanical malfunction could affect supplies. Consequently, investors should expect the unexpected next year. One of the best ways they can to do that is to own oil stocks that can easily handle lower prices since they're also well positioned to cash in if prices rebound.

More From The Motley Fool

Matthew DiLallo owns shares of ConocoPhillips. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.