Oil Prices Falter Amid Fresh Doubt Over US-China trade ties

Oil Prices Falter Amid Fresh Doubt Over US-China trade ties

Oil prices faltered in the November 11, 2019, session amid fresh doubt over progress between the US and China trade talks. Optimism for a trade deal earlier in the last week weakened after fresh ferocious opposition from the United States to rolling back existing tariffs surfaced on November 07 and after the US President reignited the sentiment on November 08.

The US President communicated reporters that he has not agreed to roll-back of tariffs sought by Beijing and that China wanted to make an agreement more than Washington did. Oil prices plummeted on re-escalating trade uncertainties and a supporting US dollar. Around one and a half year, long trade rift between the world's two large economies (US and China) have softened global economic growth and persuaded analyst community to lower demand for oil demand, raising chances of a supply glut to emerge in 2020.

International Crude Oil benchmark Brent Oil Futures averaged $59.63/bbl in October 2019 and then were up approximately $3/bbl from October 2019 in November 2019 and again down around $18.75/bbl from average October 2018, prices. This reflects the liquid commodity has experienced big swings in the past one year.

US Energy Information Administration (EIA)- Forecast

Meanwhile, the US Energy Information Administration (EIA) recently estimated that Brent Oil spot prices would average at $59/bbl in the fourth quarter of the 2019 and then it could fall to $57/bbl by the first half of 2020, which is ballpark estimate.

Despite the recent surge in supply disruption, the US EIA has estimated a downward pressure on the oil prices to be witnessed in months to come as they forecast that global oil inventories would increase in the first half of 2020. However, they estimate prices to move up to near $62/bbl mark in the second half of 2020.

The recent attack on Saudi Aramco's oil facilities on September 14, 2019, initially hindered around 5% of the global oil supply and caused a significant surge in crude oil prices on the first trading session post the attack launched on two oil facilities. However, the company has revived its capacity and was able to meet energy demand through sell from inventories and reducing local refinery consumption. By early October 2019, Brent Crude prices again pulled-back to pre-attack levels. However, the long-term impact of this attack is highly uncertain. EIA estimated that the damage on the overall capacity because of the strike launched on its two oil facilities had damaged capacity by 1mb/d; however, it is expected that OPEC’s production capacity will re-gain its pre-attack levels by 2020.

Also, it has been forecasted that average household expenditures for all major home heating fuels would be lower this winter as compared with the last year. This estimation broadly reflects warmer expected winter temperatures against a year-ago winter.

The World Oil Outlook -2019

Recently as on November 05, 2019, Organisation of Oil Exporting Countries published the World Oil Outlook (WOO), in which it was stated that global oil demand is expected to climb to 110.6 mb/d by 2040 from 98.7 mb/day posted in 2018, which reflects an increase of around 12 mb/day over the long-term.

However, it was also stated that oil demand in OECD countries is estimated to start weakening from growth after 2020, led by softening growth in OECD Americas, which is the major reason behind this, as oil demand in OECD Asia Oceania and OECD Europe has contracted in 2017 as well as in 2018. With lacklustre economic performance expected and ongoing efficiency improvement over the years to come, falling oil demand is expected to swell further.

Post peak oil demand in OECD countries in 2005, demand shifted to declining trend until 2015, and then a combination of a plunge in oil prices and comparatively high GDP growth rates particularly in OECD Americas and OECD Europe supported demand growth. But post five years of growth, the outlook for OECD oil demand is returning back to a softening trend.

The trend was largely supported by OECD Oceania where oil demand estimated to decline over the mid-term period, however, it should be taken into consideration that OECD Oceania is lowest average GDP region among all other regions and moreover it is region of highest fuel economy for the existing car fleet, primarily in Japan and South Korea. Although, there is stringent regulation on a commercial vehicle in these countries, which led to softening demand for both gasoline (petrol) and diesel as well.

Oil Price Performance- YoY

International Crude Oil benchmark, Brent Crude Oil tumbled approximately 12% in the past one year. However, it recovered substantially in between January 2019 to April 2019, but a global slowdown and recession risks turned the rally and drove it into a downtrend.

At the time of writing (as on November 11, 2019 at 09:23 AM GMT), Brent Oil January Futures traded 1.30% lower at $61.70/bbl and registered an intraday high of $62.31/bbl and a low of $61.68/bbl respectively. However, in a year-over period, it has recorded a 52w high of $75.6/bbl and a 52w low of $49.93/bbl respectively.

While, the United States WTI Crude Oil traded 1.40% lower at $56.41/bbl and touched an intraday high of $57.37/bbl and a low of $56.38/bbl, respectively. However, WTI Crude Oil has plummeted approximately 5.48% against the 12% fall in Brent Oil during the same period of time.

Conclusion

The ongoing trend prevails in the Oil prices, reflecting Brent Oil prices to move between $60-$65/bbl in near-term; however, any positive development in the US-China trade talks would push prices up, but that is going to be temporary, as global oil inventories could surge in the first half of 2020, which will weigh down on the commodity. Also, it is expected that OPEC’s additional production size will achieve pre-attack levels by January 2020, which will again add to the supply side.

Also, the risks of weaker economic growth will dent oil demand higher than earlier expected, primarily because of contracting manufacturing activities in the United States and Germany.

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