The Hindu Business Line

Be­ing overly bear­ish on crude oil is risky

- BLOOMBERG Business · Stocks & Markets · Oil Prices · Financial Markets · Finance · United States of America · China · International Energy Agency · Organization of Petroleum Exporting Countries · Saudi Arabia · Saudi Arabia national football team · Iran · Venezuela · The International

In re­cent days, crude oil prices have come un­der in­tense down­ward pres­sure. This is at­trib­uted to re­newed con­cerns over global growth and de­mand. Es­ca­lat­ing trade war be­tween the US and China is also weigh­ing on the en­ergy mar­ket.

Brent slumped to $55 a bar­rel last week, fac­ing sig­nif­i­cant losses week-on-week. Of course, the mar­ket re­cov­ered to $57 by Fri­day last and to $58 on Mon­day; but the head­winds have not dis­si­pated. WTI is priced at a mere $4 a bar­rel lower than Brent.

‘Frag­ile out­look’

The In­ter­na­tional En­ergy Agency (IEA) has painted a some­what neg­a­tive pic­ture about global oil de­mand this year and the next. IEA has re­vised down­ward its fore­cast of global oil de­mand for 2019 and 2020 be­cause of what it calls the ‘frag­ile out­look’. For 2019, IEA sees de­mand growth lower at 1.1 mil­lion bar­rels a day and en­vis­ages a siz­able sup­ply surplus by the be­gin­ning of next year if cur­rent pro­duc­tion lev­els con­tin­ued. The IEA fore­cast on oil de­mand is some­what neg­a­tive

An­a­lysts are now bet­ting on crude fall­ing well be­low $50 a bar­rel in the weeks ahead be­cause of global growth slow­down im­pact­ing con­sump­tion de­mand. Af­ter all, en­ergy con­sump­tion fu­els eco­nomic growth. The US shale oil out­put is also cited as a rea­son for an­tic­i­pat­ing a fur­ther fall in prices.

But there are dan­gers in be­ing overly pes­simistic on crude oil. We should not get car­ried away by cur­rent events and weak sen­ti­ment.

Cut in pro­duc­tion

World’s lead­ing pro­ducer and OPEC leader Saudi Ara­bia is de­ter­mined to ar­rest the price fall. It has the po­ten­tial to pro­duce well over 10 mil­lion bar­rels

a day to meet de­mand, but its ex­ports are less than what the mar­ket needs to have at present. In fact, Saudi Ara­bia is said to be se­ri­ously con­sid­er­ing fur­ther cuts in pro­duc­tion and is al­ready in talks with other pro­duc­ers to go along. At the same time, ex­ports from Iran have all but col­lapsed, while Venezuela has moved to the side­lines.

On the other hand, China’s monthly im­port fig­ures con­tinue to show no marked signs of fall­ing. There is also the like­li­hood of a stim­u­lus pack­age to boost the Chi­nese econ­omy, which is fac­ing head­winds fol­low­ing the on­go­ing tar­iff war with the US. If the stim­u­lus ma­te­ri­alises, it is sure to boost China’s com­mod­ity im­port and con­sump­tion. Im­por­tantly, ob­servers point out that the new In­ter­na­tional Mar­itime Or­gan­i­sa­tion rules set­ting new stan­dards for ma­rine fuel will boost crude oil de­mand by close to a mil­lion bar­rels a day from 2020.

Re­cov­ery prospects

Given this, sooner or later – and sooner rather than later – oil prices are likely to re­cover to above $60 a bar­rel. The WTI too can fare bet­ter be­cause drilling ac­tiv­ity in the US is re­ported to have de­clined to lev­els not seen since early last year. In other words, oil mar­ket is less likely to move on the ba­sis of the IEA fore­cast.

Once prices be­gin to move up, spec­u­la­tive cap­i­tal will move in to ex­ert an ex­ag­ger­ated im­pact on prices. We have seen this hap­pen all the time. So, from the cur­rent lev­els, an overly bear­ish ex­pec­ta­tion on crude oil would be rather risky for stake­hold­ers. In the last quar­ter of this year, it would be rea­son­able to ex­pect Brent to trade in the $60-65 a bar­rel range on cur­rent reck­on­ing.

The writer is a pol­icy com­men­ta­tor and com­modi­ties mar­ket spe­cial­ist. Views are per­sonal

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