With the recent Fed pause, the looming Brexit scenario in the UK and continuing trade wars between the US and China, the World Bank has warned of "extreme volatility" in oil markets for 2019. In this blog post, find an assessment of the Texas oil revolution of 2018 and an analysis of how the US-China trade wars will impact on market volatility, as the World Bank predicts. 

US Oil Exports: The Texas Oil Revolution

In 2018, we saw a shale boom and a reduction of trade bottlenecks in the US. This led to the US becoming a net exporter of oil for the first time in decades and also led to the country becoming the world’s top oil producer, a fact that shocked many crude oil traders in the commodities market.

In a recent interview, Chief Economist and best-selling author Daniel Lacalle explained how this Texas oil revolution was made possible. In the interview, Mr Lacalle highlighted how new technologies, efficiencies and improvements led to a disinflationary environment.

Lacalle believes that, when we saw low-interest rates and high liquidity in the US markets, we also saw a massive investment in diversification and technology, as well as alternative sources of energy such as natural gas and renewables.

The competition between sources of energy ultimately led to an energy revolution in Texas that transformed the US from a net importer of oil to an energy independent country. This is despite high growth in the economy and geopolitical challenges in the global supply chain.

A Lack of Demand: US-China ‘Trade Wars’

However, in January 2019, China announced that it would buy little to no oil during a three-month truce with the US, as high freight costs and political uncertainty were choking demand.

This meant that, although the US became the world’s top oil exporter as part of the Texas oil revolution, it still only holds a sliver of China’s market. This is because, due to supplies from Iran and Russia, Chinese companies have little incentive to buy US crude oil.

This will make the supply and demand-based market for crude oil incredibly volatile in 2019 and means that we may see the price of oil fluctuate rapidly based on whether the ongoing trade conflict between America and China can be resolved.

On March 1st, the current 10% tariff on Chinese imports will increase to 25% and, if China responds as many predict, then we may see the appetite for oil decrease even further as geopolitical tensions escalate.

However, the geopolitical tensions remain fragile, and a chance remains that the two countries will sit down before this date and lift tariffs altogether. Until we see a definite decision on this, it’s likely we’ll experience high volumes of volatility.

To conclude, 2018’s Texas oil revolution helped the US to become a net exporter of oil for the first time in decades. However, the current trade wars with China threaten to cause high amounts of volatility within the market as deadlines for new tariffs loom.