Crude oil prices are down on Friday due to growing concerns about the slowdown in the global economy, although oil production cuts by the Organization of Petroleum Exporting Countries (OPEC) and US sanctions against Venezuela provide some support for the market.
The futures on US crude oil WTI depreciated by 0.65% to 52.30 USD per barrel, while the Brent variety reported a fall of 0.57% to 61.28 USD per barrel.
The negative sentiment of financial markets, including the oil market reaction, is due to concerns that US-China trade disputes will remain unresolved. This will further exacerbate global economic growth.
Meanwhile, the European Commission sharply cut its forecast for economic growth in the Eurozone due to tensions in world trade and many internal challenges. The Commission said the Eurozone economic growth will slow down this year to 1.3% from 1.9% in 2018, before recovering to 1.6% in 2020.
Traders, however, comment that the price of oil could fall even more if it were not the measures taken by OPEC at the end of last year to tighten the market and raise prices.
Saudi Arabia cut production in January by about 400,000 barrels per day to 10.24 million barrels per day. Thus Saudi Arabia’s crude oil production is already 1.7 million barrels per day below the levels produced by the United States. The US production rose by 2 million barrels per day last year to 11.9 million barrels per day.
A supply risk comes from Venezuela, where, following the introduction of US sanctions, the analysts expect exports of between 300,000 and 500,000 barrels per day to be affected. So far, however, sanctions against Venezuela have a limited impact on the market.
Earlier this week, the government data showed that domestic crude inventories rose less than expected last week even as refineries hiked output. The stocks increased 1.3 million barrels in the week ended February 1, compared with analysts’ expectations for an increase of 2.2 million barrels. The gasoline stocks increased by 513,000 barrels, less than anticipated, while distillate stockpiles fell a greater-than-expected 2.3 million barrels.
OPEC wants an official union with Russia
Saudi Arabia and its Gulf allies want a formal partnership between the Organization of Petroleum Exporting Countries (OPEC) and the group led by Russia to manage the global oil market, turning the alliance into a cartel.
Such an alliance may further support oil prices, which would be contrary to US President Donald Trump’s aim to reduce US gasoline prices before the presidential elections next year.
But the thriving oil industry in the United States can be the biggest winner of such an alliance and boost the country’s energy independence. The US shale producers, which have reduced OPEC’s market power, have recently lost momentum due to lower prices.
OPEC’s proposal will formalize the alliance between the member states and a group of countries led by Russia, which includes some of the former Soviet republics and other states, such as Mexico. The two groups have been actively working together in recent years, including in December when they negotiated a mining bargain.
Iran and other producers are opposed to a more specific partnership, fearing that the group may be dominated by Saudi Arabia and Russia, which are the two largest oil producers in the world.
OPEC members and the group led by Russia will discuss the proposal at the meeting next week – on February 18, in Vienna. The ministers hope to negotiate a final deal when representatives of the two groups meet again in April.
Any formalization of co-operation between Saudi Arabia and Russia will be in the interest of rising oil prices from their current levels of nearly 60 USD per barrel. Saudi Arabian national budget, for example, requires oil prices to be over 80 USD per barrel. Such a move, however, will intensify tensions with Washington and trigger further attacks by Trump, who quickly criticize OPEC and its allies when they make efforts to raise oil prices.