Oil prices to stay sub­dued on ris­ing glut fears

China Daily (USA) - - BUSINESS -

NEW YORK — Down­side risks per­sist for crude oil fol­low­ing a 2018 year-end rout in both bench­mark prices, de­spite a pledge led by the Or­ga­ni­za­tion of Pe­tro­leum Ex­port­ing Coun­tries to cut out­put this year.

Cau­tion has grown among in­vestors on fears of a slack mar­ket stuck in over­sup­ply and weak de­mand. Amid the com­pounded con­cerns, crude has been trad­ing close to its 18-month low, with both bench­mark prices drop­ping more than 40 per­cent since hit­ting their four-year highs in early Oc­to­ber.

As of Wed­nes­day, West Texas In­ter­me­di­ate sank to a trough of $45.41, while Brent set­tled at $53.8.

There is wide­spread con­cern that the global mar­ket will face a sup­ply glut in 2019, de­spite an agree­ment among OPEC mem­bers and other ma­jor oil pro­duc­ing coun­tries, in­clud­ing Rus­sia, to trim pro­duc­tion this year.

The deal, signed on Dec 7 in Vi­enna, Aus­tria, stip­u­lates an out­put cut of 1.2 mil­lion bar­rels per day dur­ing the first six months of the year. OPEC mem­bers pledged a cut of 800,000 bar­rels per day, while nonOPEC pro­duc­ers pledged to re­duce their out­put by 400,000 bar­rels per day.

How­ever, in­vestors re­main skep­ti­cal whether the po­ten­tial re­duc­tion would mop up sup­ply sur­plus, with ma­jor in­vest­ment banks flash­ing red lights.

Yuan Ming, an an­a­lyst at Nan­hua Fu­tures, said: “In the short term, the Dow Jones in­dus­trial av­er­age may have fur­ther space to ex­plore, which may ag­gra­vate fur­ther down­side pres­sure on the oil mar­ket. At present, the down­ward trend of the oil mar­ket re­quires the fun­da­men­tal crude oil sup­ply and de­mand to be re­versed.”

“When de­mand is weak, OPEC mem­bers and non-OPEC pro­duc­ers cut­ting pro­duc­tion will be the most im­por­tant force for the oil mar­ket to re­bound,” Yuan added.

He noted that the low oil price in the fourth quar­ter of 2018 may af­fect the pro­duc­tion in­crease in the United States crude oil in the sec­ond quar­ter of 2019, which will also ben­e­fit the oil mar­ket in 2019.

“In the short term, in­vestors are ad­vised to wait and see, wait­ing for whether the ac­tual pro­duc­tion re­duc­tion from OPEC mem­bers and non-OPEC pro­duc­ers in Jan­uary 2019 can meet mar­ket ex­pec­ta­tions.”

Brent crude is ex­pected to av­er­age just over $69 a bar­rel in 2019, lower than a Novem­ber fore­cast of about $77, ac­cord­ing to a poll of 13 in­vest­ment banks by the Wall Street Jour­nal.

The West Texas In­ter­me­di­ate is pro­jected to av­er­age just over $63 a bar­rel, down from the Novem­ber fore­cast of $70.

The sur­vey came at a time of a marked speedup in pro­duc­tion growth this year by coun­tries in­clud­ing the United States, Saudi Ara­bia and Rus­sia.

“In the end, OPEC’s in­ter­ests came out first, as we ex­pected, and the rest of the world came sec­ond. Mem­ber coun­tries have their own bud­getary and for­eign ex­change re­serve is­sues, and Amer­ica is now en­ergy in­de­pen­dent,” Fran­cisco Blanch, head of com­modi­ties and de­riv­a­tives re­search at Bank of Amer­ica Mer­rill Lynch, told Xin­hua News Agency.

The out­put of seven ma­jor US shale basins is ex­pected to hit 8.17 mil­lion bar­rels per day in Jan­uary, thanks to an in­crease of 134,000 bar­rels per day since Septem­ber, ac­cord­ing to a re­port from the US En­ergy In­for­ma­tion Ad­min­is­tra­tion.

Cur­rently, the US is the world’s top oil pro­ducer, pump­ing an es­ti­mated 10.88 mil­lion bar­rels per day, sur­pass­ing Saudi Ara­bia and Rus­sia. US oil in­ven­to­ries fi­nally shrank for the third con­sec­u­tive week fol­low­ing in­creases for 10 weeks in a row, ac­cord­ing to EIA data.

“The US pro­duc­tion num­bers are very im­pres­sive,” said Ray­mond Car­bone, pres­i­dent at New York­based Para­mount Op­tions, re­fer­ring to de­vel­op­ments in the oil mar­ket “cre­at­ing a bear­ish storm”.

With the con­tin­ued in­crease in US sup­ply, Wood Macken­zie, a United King­dom-based re­search and con­sul­tancy firm, said in early De­cem­ber it ex­pected a year-onyear in­crease of 2.4 mil­lion bar­rels per day in non-OPEC pro­duc­tion.

“That com­pares to our fore­cast for oil de­mand to in­crease by just 1.1 mil­lion bpd in 2019, leav­ing lit­tle room for a sig­nif­i­cant in­crease in OPEC pro­duc­tion next year and mak­ing a pro­duc­tion cut ne­c­es­sary to sta­bi­lize prices,” said Ann-Louise Hit­tle, vice-pres­i­dent for macro oils at Wood Macken­zie.

The In­ter­na­tional En­ergy Agency pro­jected a slow global oil de­mand growth of 1.4 mil­lion bar­rels per day in 2019, while the EIA fore­cast an es­ti­mated in­crease of 1.5 mil­lion bar­rels per day.

It is be­lieved that such wor­ries are at­trib­ut­able to deep­en­ing con­cerns over slow­ing global eco­nomic growth, amid signs such as eq­ui­ties sell-offs, as well as geopo­lit­i­cal chal­lenges caused by global trade ten­sions and US sanc­tions against Iran.

“What has hap­pened in my opin­ion re­cently is a con­flu­ence of many non-oil fun­da­men­tal is­sues, in­clud­ing the geopo­lit­i­cal is­sues,” Saudi Ara­bian En­ergy Min­is­ter Khalid Al-Falih told re­porters in Riyadh ear­lier. OPEC and non-mem­ber pro­duc­ers are ex­pected to meet next in April 2019.

Oil con­sump­tion in emerg­ing economies across Asia, such as China and In­dia, which ac­count for roughly two-thirds of global oil de­mand, is ex­pected to shrink due to a pro­jected slow­down in eco­nomic growth.

“Most ma­jor economies are likely to see de­cel­er­at­ing ac­tiv­ity, with real GDP growth of 1.4 per­cent in both Europe and Ja­pan, and 4.6 per­cent growth in ag­gre­gate among the emerg­ing mar­kets,” Bank of Amer­ica Mer­rill Lynch said re­cently.

The strong US dol­lar has also put pres­sure on oil in re­cent months, as con­stant stock mar­ket volatil­ity pushed the safe-haven cur­rency higher and made dol­lar-de­nom­i­nated crude more ex­pen­sive. The Fed­eral Re­serves’ fourth in­ter­est rate hike last year fur­ther com­pli­cated the sit­u­a­tion by fan­ning anx­i­eties over sag­ging eco­nomic growth.

The com­bined ef­fect of a ris­ing dol­lar and higher bor­row­ing costs has pared de­mand in key emerg­ing mar­ket economies and made in­vestors shun risky as­sets aligned with the global econ­omy, in­clud­ing crude oil and eq­ui­ties.

What is worse, a par­tial shut­down of the US gov­ern­ment has con­trib­uted to losses in eq­ui­ties.

The crude fu­tures mar­ket fell in tan­dem with eq­ui­ties, as en­ergy stocks ac­count for around 6 per­cent of mar­ket cap­i­tal­iza­tion glob­ally, ac­cord­ing to Swiss fi­nan­cial in­sti­tu­tion UBS.

“The short-term pain of lower oil prices for com­pa­nies and pro­duc­ers can over­shadow the long-term gains for oil con­sumers, as in 2015. On De­cem­ber 18, a 2.4 per­cent fall in en­ergy stocks con­trib­uted to an early gain in the S&P in­dex be­ing er­ased,” the in­vest­ment bank said in a re­cent ar­ti­cle.

Car­bone also noted the link be­tween oil prices and the eq­ui­ties sell-off: “One can­not dis­count the re­cent down moves in the eq­uity mar­kets. We are back to a strong dol­lar dur­ing mar­ket tur­bu­lence as well as eq­uity prices re­vert­ing to a barom­e­ter of fu­ture de­mand.”

An­a­lysts are also wary about what lies ahead, af­ter the OPEC-led out­put curb ex­pires in the sec­ond half of 2019, though Al-Falih ex­pressed op­ti­mism last week for the ex­ten­sion of the OPEC-led De­cem­ber agree­ment.

“We will meet in April and I’m cer­tain that we will ex­tend it,” the Saudi en­ergy min­is­ter said. “We need more time to achieve the re­sult.”

“It is es­ti­mated that in 2019, there will be a small sur­plus in the in­ter­na­tional oil mar­ket, and the sur­plus will be around 800,000 bar­rels per day. There is no rea­son to be ex­ces­sively pes­simistic,” said Zhong Meiyan, a re­searcher at Ever­bright Fu­tures.

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