Oil prices have fallen sharply to levels not seen for almost a year as traders see a return of a glut in supplies at a time of falling demand. The price of oil refers to the spot price of a barrel of benchmark crude oil—a reference price for buyers and sellers of crude oil such as West Texas Intermediate-Brent ICE…
Oil prices have fallen sharply to levels not seen for almost a year as traders see a return of a glut in supplies at a time of falling demand.
Background
The price of oil refers to the spot price of a barrel of benchmark crude oil—a reference price for buyers and sellers of crude oil such as West Texas Intermediate-Brent ICE, Dubai Crude, OPEC Reference Basket, Tapis Crude, Bonny Light, Urals oil, Isthmus and Western Canadian Select. There is a differential in the price of a barrel of oil based on its grade—determined by factors such as its specific gravity or API and its sulphur content—and its location—for example, its proximity to tidewater and /or refineries.
Analysis
Oil prices fell yet again on Tuesday, with the string of losses starting to mount. WTI fell below $60 and Brent fell below $70, hitting fresh one-year lows in the morning. Saudi Arabia is trying hard to stop the price declines, but it is going to need to convince OPEC+ to do more at the upcoming meeting in three weeks’ time.
Oil has also been under pressure on growing concern over a possible slowdown in global growth as the U.S-China trade dispute remains unresolved, and is starting to hit emerging market economies in particular. There’s a trifecta of trouble created by US stockpile builds, OPEC overproduction and the watering down of Iran sanctions, said Bob Yawger, director of futures at Mizuho in New York.
China’s manufacturing sector in October expanded at its weakest pace in over two years, having taken a hit by the slowing down of domestic and external demand, in a sign of deepening cracks in the economy from the trade war with the United States. “Oil investors are now betting on the potential of a global slowdown,” said Bruce Xue, an analyst with Huatai Great Wall Capital Management.
OPEC trimmed its oil demand forecast for 2019, the fourth consecutive month that it has done so. The cartel now only sees demand rising by 1.29 mb/d in 2019, down another 70,000 bpd from last month’s forecast. At the same time, non-OPEC supply is expected to grow by a massive 2.23 mb /d next year, an upward revision of 120,000 bpd.
OPEC is scrambling to stop the slide in oil prices. Saudi Arabia announced that it would cut exports by 500,000 bpd in December, and it is working with OPEC+ to engineer a collective cut of about 1 mb/d, which could be on the table at the upcoming meeting in Vienna in early December. The cuts are needed as the market is suddenly awash in fresh supplies.
Last year, the five largest oil majors saw their “proven reserves life” fall to the lowest level in a decade. The majors slashed costs after the oil market downturn in 2014, and that has translated into several years in which they have produced more oil than they have discovered, leading to a significant decline in life of their reserves. The flip side of that is that investors no longer prioritize growth above all.
Capital Economics said it was clear that “fears over excess supply in the oil market are starting to build”. It said that it expected “subdued global economic growth” to drive demand even lower than OPEC was currently forecasting.
Brent Crude has now fallen over 25% since hitting a four-year high in early October, while US oil has lost 28% since its October peak. “It’s like a run on the bank. It’s getting to the point where it doesn’t seem to be about fundamentals any more, but a total collapse in price,” said Phil Flynn, the analyst at Price Futures Group.
The latest drop in price comes after US President Donald Trump tweeted on Monday that he hoped there would be no oil output reductions after Saudi Arabia said on Sunday that OPEC was considering cutting supply next year. Iran said it has so far been able to sell as much oil as it needs and urged European countries opposed to U.S. sanctions to do more to shield Iran.
Assessment
Our assessment is that the OPEC and their allies including Russia may take steps to reduce supply to support of parity of $ 70 per barrel. We believe that the fall in prices is due to the softening of US sanctions on Iran and the strengthening of the US dollar.
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