Oil Price: Despite pessimism, a downturn is not yet established

Though it is still early, the year which began with some degree of uncertainties, a downturn in oil price is not yet an established fact.

Oil is officially back in a bull market as confidence grows over both the strength of the global economy and the willingness of OPEC+ to adhere to its production cut agreement. Oil entered a bull market having gained 20 percent since the low point reached in December. WTI rose above $52 per barrel, while Brent moved above $61.

At its last meeting in December 2018, OPEC and its non-OPEC partners agreed to curb output by 1.2 million b/d for the first six months of this year. Given rising US output and the deepening gloom overhanging the global economy, this was regarded by the market as inadequate, causing oil prices to plummet from just over $60/bbl in mid-December into the low $50s towards year’s end.

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There are indicators it will not be a bleak year after all for oil producers. The OPEC-led cuts, which officially began in January, are aimed at reining in an emerging glut as US crude output has surged to a record 11.7 million bpd. Khalid al-Falih, Saudi Arabia’s energy minister said he was confident that action to rein in output would bring the oil market into balance. Al-Falih also said he would not rule out calling for further action.

It is clear the US-China trade war is hurting both sides, thus, a deal was reached in December to delay the imposition of further tariffs. Chinese and US officials started new talks on January 4. The trade talks in Beijing were carried over into an unscheduled third day, amid signs of progress on issues including Chinese purchases of US farm and energy commodities. State newspaper China Daily said Beijing was keen to end the trade dispute, but that any agreement must involve compromise. It may be difficult to gauge the impact of a reduction in trade tensions between China and the US but a subdued tension could change the economic outlook for 2019, and thus the demand outlook for oil, quite radically and fairly quickly.

The supply side appears to be helping prices too. Saudi Arabia appears to have followed through on promises to cut oil production in December, despite the new OPEC/non-OPEC agreement only coming into effect from January.

According to a Reuters survey, OPEC output fell by 460,000 b/d in December, Saudi Arabia accounting for 400,000 b/d. Riyadh appears once again to be willing to over comply, potentially supported by the UAE and Kuwait, suggesting that OPEC as a whole may deliver more than it has promised and sooner.

Brent crude is bumping along in the mid-$50s, but US marker West Texas Intermediate is a good $9/bbl lower putting it in the high-$40s, a sea change from the first 10 months of last year and not a price level that will sustain the expansion of 2018. If the fourth-quarter pause continues into the first-quarter 2019, the EIA’s forecast of a rise in US crude production from an average 10.9 million b/d in 2018 to 12.1 million in 2019 will almost certainly be revised down.

There are in effect two short-term corrective factors in the oil market; OPEC/non-OPEC producers’ willingness to agree and implement cuts and US shale production. While the actions of one counteract the actions of the other, both are price responsive, which results in an imperfect, jerky synchronicity.

FRANK UZUEGBUNAM