How low could oil go? Could Brent crude limp to $60?
A 12-session losing streak for oil is over.
Wednesday saw the first rise for both West Texas Intermediate (WTI) and Brent, but it’s certainly no indication that prices are on their way up again. Not yet.
WTI oil for December delivery rose 56 cents, or 1%, to settle at $56.25 a barrel, after settling Tuesday at $55.7. Brent crude, down about 23% from its peak in October, posted a January delivery at $66.12, 1% moiré or plus 65 cents from Tuesday.
Jameel Ahmad, Global Head of Currency Strategy and Market Research at FXTM said late Wednesday that the dramatic selling across the oil markets in recent days has come to a brief pause, but many remain stunned by the acceleration in aggressive momentum that has transpired over the past couple of sessions.
Days of reckoning
“We have not seen such a disastrous day for the Oil markets in terms of negative momentum like the one on Tuesday in around three years. But I think what we need to accept moving forward is that traders are waking up to the significant threat that slowing global growth in 2019 will weaken demand for commodities like Oil. It is fears over lower demand for Oil that acted as the catalyst for the severe selling that took place yesterday,” writes Ahmad.
“It is very much possible that the Oil markets have not yet found a floor in selling despite both Brent Crude and WTI declining significantly beyond 20% after their four-year highs just a few weeks back.”
CNBC reports that oil settled down on Wednesday after plunging 7% the previous session, with surging supply and the specter of faltering demand scaring off investors.
US crude production hit a record 11.6 million bpd on the way to 12 million bpd within the first half of 2019.. Saudi pumps 10.6 million bpd. We have a situation.
“Oil markets are being pressured from two sides: a surge in supply and increasing concerns about an economic slowdown, as seen with the economic contractions in powerhouses Japan and Germany during the third quarter as well as in China’s falling car sales,” said CNBC.
Rationale for cuts
Khalid al-Falih, Saudi Arabia’s energy minister, said Monday that OPEC realized a 1 million bpd decline in oil supplies from October levels was required to balance the market, as reported by the Financial Times (FT).
The danger is that oil prices could drop to $50 if producers are not careful.
According to Business Insider, analysts remain concerned that prices could drop below $50 a barrel.
Craig Erlam, a senior market analyst at Oanda, said on Wednesday: “Prices may well have further to fall. I wouldn’t be surprised to see prices for WTI to slip to $50 a barrel, and Brent to $60.”
“It’s not too long ago that people were talking about the prospect of $100 a barrel oil but that now feels like a distant memory,” he added.
David Lennox, resource analyst, Fat Prophets, told the Economic Times: “A week or two ago, the Saudis and Russians together were saying that in 2019 they would be looking to cut production. It is primarily because there is adequate supply in the market and of course, demand may be softening.”
OPEC’s estimate for the next year is just over 100,000 million barrels of global supply.
“If we are right then we will definitely require OPEC to cut back from the 32.9 million barrels that they did for the month of October. If they do not, then could see oil prices going sub $50,” Lennox added.
Saudi Arabia announced plans on Sunday to cut shipments by half a million barrels per day in December.
The odds are “fairly high” that OPEC and its allies will announce next month a production cut of about 1 million barrels per day, according to Helima Croft, global head of commodity strategy at RBC Capital, telling CNN.
U.S. President Donald Trump said he hoped there would be no oil output reductions.
“Hopefully, Saudi Arabia and OPEC will not be cutting oil production,” Trump wrote on Twitter. “Oil prices should be much lower based on supply!”
What about Iran?
Reuters said the market had anticipated that exports from OPEC member Iran would fall precipitously following the institution of U.S. sanctions in November, but waivers were granted to certain major importers of Iranian crude, diminishing the expected cuts.
“Output from the world’s top oil producers Russia, the United States, and Saudi Arabia has risen by 1.05 million bpd in the last three months, based on official output figures,” said Reuters.
“This has left OPEC scrambling to adjust its own output, which, at around 33.3 million bpd, accounts for roughly a third of global supply.”
2019 oil picture
OilPrice.com, a prominent industry site, said OPEC cut 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 million bpd 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 million bpd next year, an upward revision of 120,000 bpd. “Although the oil market has reached a balance now, the forecasts for 2019 for non-OPEC supply growth indicate higher volumes outpacing the expansion in world oil demand, leading to widening excess supply in the market,” OPEC said.
According to figures from the OPEC World Oil Outlook 2040, the total oil and gas value chain will need around $10.5 trillion in funding between 2017 and 2040, to achieve a ‘balanced and stable’ oil market.
As reported by OilPrice.com, a prominent industry site, this includes $7.9-trillion invested in upstream production or around $328-billion per year.
The upstream oil and gas industry could save $75 billion per year through digitalization, according to a new report from Wood Mackenzie.
Downstream industries will need around $1.5-trillion, with around $915-billion of that going just to repair and maintenance, and the midstream sector around $1.1-trillion.
The IEA said in its World Energy Outlook, out on Tuesday, that oil demand will continue to grow by about 1 million bpd per year through 2025, after which demand growth slows to 0.25 million bpd before peaking in 2040.