Oil prices to stay subdued on rising glut fears

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.