On 29 September, Bloomberg ran a piece entitled “What Oil at $100 a Barrel Would Mean for the Global Economy.” On 1 October, CNBC ran a story they titled “OPEC ‘powerless to prevent’ oil prices jumping towards $100 a barrel this year.”
Oil 300 Minute Chart
And yet, oil prices have tumbled more than 20% since the beginning of October with the largest single day drop occurring on Tuesday, 13 November.
Instead of pushing $100 per barrel, WTI is fighting to stay above the $55 per barrel mark. Instead of wondering whether smaller cars and fuel efficient hybrids will be making a comeback this holiday season, forecasters are talking about slowing global economic growth and softening demand for crude oil.
The sudden plunge in oil prices can be attributed to several factors including:
- The release of a new OPEC report in which the group revised down its demand forecasts for 2019;
- A tweet from President Trump that began a sell-off on Monday and Tuesday;
- The strong dollar;
- Higher-than-anticipated oil production from U.S. shale oil regions;
- Larger than expected builds in U.S. crude oil inventories;
- The decision by the U.S. government to grant exemptions from sanctions on Iranian oil; and
- Wall Street banks selling oil futures to reduce their exposure from producer hedges.
OPEC Secretary General Mohammad Barkindo added another reason to this list—market “anxiety” over the coming OPEC meeting.
Even though markets pared back some of oil’s losses on Wednesday morning, the focus has shifted entirely to OPEC and Russia. OPEC’s next meeting will take place in Vienna on 6 December and the OPEC+ meeting will be held the following day.
On Monday, Saudi oil minister Khalid al Falih told reporters that Saudi Arabia would likely be cutting its exports by 500,000 barrels per day in December, owing to fewer nominations from customers. This does not mean Saudi Arabia will cut oil production. Even if it does not export this oil, Saudi Arabia may produce it and put it in storage, particularly since Saudi Arabia’s stored oil decreased over the summer months.
OPEC+ is reportedly considering cutting oil production by 1.4 million barrels per day. Predictably, Russia has already said that it considers a cut of this scale too much. However, Russian oil production typically contracts during the winter months, so Russia’s opposition may be more for show and posturing than actual opposition.
It is also possible that the OPEC+ countries that recently increased production above their allocations (Saudi Arabia, Kuwait, UAE and Russia) will agree to return to previous levels. They had increased their production to compensate for losses from Venezuela and Iran.
But it is also possible that OPEC+ could decide against reducing oil output at all and flood the market with oil. OPEC does not appear to be keen on this option at present, but there is still a great deal of time between now and the December meeting.
Besides, there is still a chance that oil demand in 2019 may not be as soft as OPEC anticipates. Even with the exemptions, Iran’s exports are likely to be reduced by at least a million barrels per day from its September and October exports.
As well some data indicate that the U.S. economy is healthy and demand in the U.S. for products like jet fuel continues to be strong. In addition, unemployment in the U.S. is remarkably low, another good sign for demand.
With lower oil prices, independent Chinese refineries may increase production, yet another important component of strong global demand. Also, rising interest rates in the United States and the recent drop in oil prices, could curb production growth in the shale patch from the all-time highs we are currently witnessing.
While the news today indicates greater production than demand, that may change. Particularly if prices stay too low or drop further.