Crude oil prices are down on Wednesday under pressure from rising US stockpiles, strong declines on capital markets, and China’s government warnings about rising economic problems. The futures on US crude oil WTI with delivery in January fell by 1.30% to 52.56 USD per barrel, while the Brent oil depreciated by 1.29% to 61.28 USD per barrel.
According to the analysts, the WTI may soon test support at 51.75 USD per barrel, while Brent is threatened by a price drop below 60 USD per barrel.
Pressure on oil causes also the US stockpiles data by the Americal petroleum Institute, which shows growth of 5.4 million barrels to 448 million barrels for the week ending November 30. According to the figures, the US market is over-saturated. However, official data on US oil production and stockpiles are expected later on Wednesday.
Economic events affecting oil price
The fall in oil prices followed the sell-offs on global stock markets on Tuesday, as investors are worried about a more general slowdown in economic growth.
The key to the prospect of the global economy is whether the US and China can resolve their trade disputes. Washington and Beijing announced a 90-day ceasefire in their trade war. However, there are concerns that the ceasefire may not continue. The US President Donald Trump threatened to impose “big duties” on imports of Chinese goods if his administration does not reach a deal with Beijing.
Meanwhile, the State Council of the People’s Republic of China gave directions Wednesday to support employment in the country in the context of the economic downturn, saying the country should pay attention to the impact of employment on the growing economic challenges.
Another major issue on the global markets was the bond phenomenon: inverted yield curve. The inverted yield curve happens when bond yields at the short end of the bond spectrum rise above those at the long end. Usually, the bond market focuses on the difference between the yields on US Treasury two-year notes and those for 10-year notes. For economists and investors, it’s a loud warning about the economy’s outlook. The inverted yield curve is a “harbinger of doom”. It has a scarily accurate track record of predicting economic recessions, which in past decades have arrived between six months and two years after an inversion.
This raises the threats for the US economy, which is actually the largest consumer of crude oil. In case of a slowdown of the economy, the oil consumption growth will be limited, which worsens the situation on the over-saturated market.
Saudis chess game at OPEC+ meeting
Donald Trump’s tweets put pressure on the meeting of OPEC representatives and their allies this week in Vienna. The US President focused on Saudi Arabia, which has already announced plans to cut oil production.
Under these conditions, he is forced to defend the Saudis against the backdrop of evidence from the CIA about the participation of Crown Prince Mohammad Bin Salman in the murder of journalist Jamal Khashoggi. Donald Trump hopes that Saudi Arabia will give up the cuts in oil production and thus prevent the raising of the oil price.
Saudi Arabia needs to strengthen its relations with the West, but at the same time, it does not want to sell its oil at lower prices.
The budget deficit of the kingdom is still high. The state oil company Aramco is also heading for a comprehensive transformation and plans to become public in 2019, bringing the Kingdom billions of dollars. Moreover, Saudi Aramco plans make one of the largest bonds issues with the idea of financing the purchase of a large state-owned chemical company Sabic. This will require a lot of money, which means the Saudi government desperately needs a serious growth in oil prices. This, of course, is the opposite of what Donald Trump wants.
And while Saudi Arabia is under pressure, the six-member OPEC+ ministerial monitoring committee, led by Russia and Saudi Arabia and also comprising Kuwait, Venezuela, Algeria, and Oman, will convene on Wednesday in the Austrian capital. Russia would eventually agree to cut its oil production, but no formal agreement was reached. Iran fully denies additional cut, afraid that OPEC will lose market share.
The discussions are still running. However, although the agreement may enter force on January 1, 2019, Middle Eastern countries are unlikely to take practical measures to reduce their oil output before March, because many of them have already signed contracts for deliveries in January and February.
Oil price forecasts
Bank of America Merrill Lynch warned in its economic forecast for 2019 for a slowdown in most major economies, although the “steady flow of monetary and fiscal stimulus” is expected to stop the slowdown. The investment bank expects Brent and WTI prices to reach 72.80 USD and 66.10 USD per barrel in 2019.
JP Morgan Chase revised its outlook on Brent crude to 73 USD per barrel on average. The bank’s earlier forecast was for an average Brent crude price of 83.50 USD per barrel. The analysts had factored in the increase in supply in North America that will occur in the second half of 2019 and will eventually pressure prices even lower in 2020, to an average 64 USD per barrel in that year.
The World Bank had upgraded its outlook for the Russian economy, expecting oil price to average 71 USD per barrel over the next three years. The financial institution confirms that the demand is expected to remain robust, with the International Energy Agency forecasting an increase of 1.4 million barrels per day, although their forecast has been revised down relative to earlier estimates as a result of weaker global growth and higher prices.
In its June report on global economic growth prospects, the World Bank upgraded the oil price outlook for 2018 to 70 USD per barrel (12 USD higher against its previous outlook), and for 2019 to 69 USD per barrel (10 USD higher).