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Crude oil medium-term analyze

What can we expect from the crude oil prices in medium-term?

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The crude oil is among the major commodities and being into the spotlight on trading markets during the last several months. The turbulence in prices recent weeks reflects the geopolitics and stays in the heart of the mid-term elections campaign for the US Senate. The analysts are divided into their opinion for the crude oil price trend by the end of the year and 2019, as many of the being skeptic for reaching 100 USD per barrel. The US investment bank Goldman Sachs says there are reasons to believe that prices for a barrel of Brent crude oil will rise above 80 USD before the end of the year, but keep its projection that prices will not reach 100 USD in medium-term. Even not reaching 100 USD per barrel, the Brent oil might exceed the threshold of 90 USD in medium-term.

Several factors will affect the crude oil price in next month. First of all is the US-China trade war, which will dictate the trend in the end of November. Sanctions against Iran and production data from the US, Saudi Arabia and Russia will dictate the trends in mid-November. Earlier, the mid-term elections for the US Senate will also affect the price of crude oil, although slightly.

The US-China trade war

The trade tension between Beijing and Washington is one of the major topic in the world economics. The trade ware between the two economy powers worsen the economy growth projections for 2018 and 2019, which reflects the global oil demand forecast. Thus, the lower economic growth will reduce the oil demand projections, which in turn decrease the mid-term forecast for oil prices. However, many commodity analysts see the trade tension between the US and China reaching saturation point for the oil markets.

In the end of November, on the sidelines of the G20 summit in Argentina, Donald Trump and Chinese president Xi Jinping will meet to discuss the trade relations between the two economic powers. The US President is quite optimistic that both will reach an agreement and start a trade talks, which will ease tension on the trade front. The White House administration already started drafting some proposals for the future trade talks between the two countries. On other hand, China also gives signs that is ready to start trade talk with the US and remove some of the duties and trade barriers.

On the US-China trade front there are two scenarios:
– Beijing and Washington start trade talks and remove some of the trade constrains, thus supporting the global economic growth and raising projections for oil demand. This definitely will support the oil price and will offset the effect of the Iranian sanctions, which in end of November already had to be diminished. Thus the price of West Texas Intermediate (WTI) crude oil will move up, moving the other major variety, Brent, also up. Thus we can expect strong increase in end of November and beginning of December to over 85-90 USD per barrel (for Brent oil).
– Trade talks fail and both side turn from trade war to economic and currency war. Thus, the US finance ministry might try to devalue its currency and stimulate the exports, thus reducing the trade deficit on the current account. This will also send the price of commodities up – pushing both major varieties to high levels. In such scenario the Brent oil will move up to 80-85 USD per barrel.

brent oil price curve

Sanctions against oil exporting countries

The US sanctions against Iran enter into force already today. The country promised to exclude eight countries from the sanctions for short-term, but not yet specified their names. The sanctions on Iran’s oil sector will wipe out about 1-1.5 million barrels per day from the world market. They can be compensated by the increasing production from Russia and Saudi Arabia, as well as the shale boom in the US, but hardly.

The US also plan to impose sanction against Venezuela’s gold sector, which will affect somehow the oil production of the country, which is in heavy social-economic crisis. However, Venezuela oil production had cut by half of from the 2015 levels, reaching 1.0 million barrels per day. The country hardly will lose much of its output, even despite the sanctions, due to the long-term oil-for-debt contracts.

Output of the biggest oil producers

Saudi Arabia, Russia and the US are competing to announce records in output. The United States has overtaken Russia in August, shifting it from the position of the world’s largest oil producer, with average output of 11.346 million barrels per day. In October, Russian oil production has reached its highest levels of 11.412 million barrels of oil per day. Saudi is also not lagging behind with record output of 10.508 million barrels per day in September. Thus, the three largest oil producers are competing to gain higher market share against the problems in countries like Iran, Venezuela and Libya.

The high oil prices continue to stimulate opening new rigs and funding new projects in the US shale oil sector. The production in the US is growing steadily and the favorable conditions on the markets are not giving signs for stalling or decreasing.

US oil production

Midterm elections for the US Senate

The mid-term elections in the US will have some international response and possibly will affect the commodity markets. Polling suggests Democrats are unlikely to win the Senate – and may even lose seats. But in the House, Democrats need to flip 23 Republican-held seats to take control, which would restrict Trump’s ability to act on some of his key election promises, like the border wall.

Even not a major vote for the US, the midterm elections will change the politics in the US, either giving more freedom for Donald Trump’s policies or to restrict them. Some win for the Democrats will possibly raise the oil price, as will lead to choking on the protectionism policy of the US.