There are a myriad of factors influencing current global oil prices. On the supply side there is what can be called a back and forth tension between the OPEC+ oil production cuts, led by Saudi Arabia who is exceeding its pledge as part of the deal reached in January to remove 1.2 million bpd of oil supply from the market, against the continued ramp up in U.S. oil production, led by unconventional oil production, predominantly from the Permian Basin.
The U.S. has now reached the 12.1 million bpd oil production point, and will likely see production above that level for the rest of 2019 as supply restraints in the Permian ease. U.S. oil output has increased a staggering 2 million bpd in just one year - making the U.S. the world's largest oil producer, ahead of both oil production heavyweights Russia and Saudi Arabia. Other supply-side factors include U.S. sanctions against both Iran and Venezuela that have removed barrels from would oil supply, as well as Libya, whose largest oil field recently started producing again, which could cause problems for the OPEC+ group of producers efforts to keep a check on oil supply.
Demand-side dynamics
The demand side of the current oil equation is also multifaceted. First, global economic growth is stagnating, not only in China due to the ongoing trade war with the U.S., but in numerous other regions as well. Yesterday, the OECD cut forecasts again for the global economy in 2019 and 2020, following on from previous downgrades in November, as it warned that trade disputes and uncertainty over Brexit would hit world commerce and businesses. The OECD forecast in its interim outlook report that the world economy would grow 3.3 percent in 2019 and 3.4 percent in 2020. Those forecasts show cuts of 0.2 percentage points for this year and 0.1 percentage points for 2020, compared to the OECD's last set of forecasts in November. Related: Bloomberg Launches Alternative To Green New Deal
"High policy uncertainty, ongoing trade tensions, and further erosion of business and consumer confidence are all contributing to the slowdown," the OECD said in its report. "Substantial policy uncertainty remains in Europe, including over Brexit. A disorderly exit would raise the costs for European economies substantially," the report added.
OECD report
In addition to the OECD report, news broke on Friday that also weighed on concerns over oil demand growth going forward. Reuters reported that China's exports dropped the most in three years in February while imports fell for a third straight month, pointing to a further slowdown in the economy and stirring talk of a trade recession, despite a spate of support measures by Beijing. Chinese shares dropped by more than 4 percent on the news. The disclosure came just one day after the European Central Bank slashed growth forecasts for the region.
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In the U.S., job growth likely slowed to a five-month low in February, reports indicated on Friday, as tougher financial conditions set in. All of this disconcerting news will likely continue to confuse oil markets, which sometimes reacts to supply-side dynamics while sometimes responding to economic growth worries and oil demand concerns. The news also comes as Washington and Beijing continue to hammer out what looks like a reasonable shot at a trade deal. For Trump, besieged at home on nearly every front and coming just over a week after a disappointing summit with North Korea, a successful trade deal with China would, or at least should, draw some attention away from the current poisoned political discourse in Washington.
Trade war dangers
The danger for the U.S. side is that Trump, now eager for a trade deal win, could concede too quickly. However, even if a trade deal is reached, it will take considerable time for the removal of the current tit for tat tariffs to trickle down to the global economy. Moreover, no trade deal, with the prospect of tariffs remaining in place and even more tariffs enacted, would take both the world economy and global oil markets into unchartered territory. The dynamic of interconnected global markets, unprecedented in its scale, is one that will continue to expand - something that both the U.S. and China should consider going forward.
In lockstep with this worsening global economic picture, global oil prices dropped nearly 2 percent on Friday. London-trade Brent crude futures, the global benchmark, tanked by $1.22, 1.9 percent, to $65.08/barrel AT 1040 GMT. NYMEX-traded, U.S. oil benchmark West Texas Intermediate (WTI) futures also dropped, down 96 cents (1.7 percent) from the previous day, at $55.71.
By Tim Daiss for Oilprice.com
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I'm an oil markets analyst, journalist and author that has been working out of the Asia-Pacific region for 12 years. I’ve covered oil, energy markets… More
Comments
The same global market fundamentals that pushed prices to $87 in November last year even at the height of the trade war between China and the US still exist and as robust but with more promise.
Since then, three bullish factors have been at play. One is strong indications of the imminent end of the trade war. A second factor is that the OPEC+ production cuts and the strict adherence by the producers are effectively reducing the glut in the market with the possibility that OPEC+ could extend the production cuts to the end of the year if needed to ensure that the market becomes irrevocably balanced. A third factor is Saudi Arabia’s unwavering determination to get oil prices beyond $80 in order to balance its 2019 budget as manifested by its deep cuts of its production and exports in March beyond its commitment under the OPEC+ cuts agreement.
And despite reports by Reuters about a slowdown in China’s economy, China’s crude oil and natural gas imports continued rising in February with crude oil imports hitting 10.26 million barrels a day (mbd) which was a 21.6%--increase over the same period last year. This is not a sign of a slowing down Chinese economy. In fact China’s oil imports are projected to hit 11 mbd this year.
The global economy will be buoyed by strong indications of an imminent end to the trade war between the US and China. President Trump is very keen to reach a deal with China because a continuation of the trade war has been seriously undermining the US economy as demonstrated by job growth in the US slowing to a five-month low in February as tougher financial conditions set in. For Trump, besieged at home by the current poisoned political discourse in Washington and coming just over a week after a disappointing summit with North Korea, he badly needs to show some success in his international negotiations. A successful trade deal with China would be the answer.
Two important observations are worth noting however. One is a noticeable correlation between announcements by the US Energy Information Administration (EIA) of a rise in US oil production or a build in US crude oil and product inventories or both and surges in oil prices. Observers could not fail to realize that such utterances are aimed at depressing oil prices. However, the global oil market is starting to discount the EIA claims.
Another observation is the claim that US oil production has now reached 12.1 mbd, a staggering 2 mbd increase in one year making it the world’s largest oil producer, ahead of both Russia and Saudi Arabia. This is a pack of untruths and I will explain why. In 2017 the EIA claimed that US production averaged 10.9 mbd when in fact it only averaged 9.35 mbd according to the 2018 authoritative OPEC Annual Statistical Bulletin, a reduction of 1.55 mbd. In 2018, the EIA claimed that US production averaged 11.7 mbd but it later admitted that production averaged 10 9 mbd, a decrease of 800,000 barrels a day (b/d). Now and despite a slowdown in the Permian which contributes more than 70% to US shale oil production, the EIA is claiming that US production has reached 12.1 mbd. Using the EIA own figures, the US couldn’t have added 2 mbd in one year. It would have added only 1.2 mbd over its 2018 production of 10.9 mbd. Still, based on the EIA production figures for 2017 and 2018, we can safely deduct 1 from the 2019 figure of 12.1 mbd thus reducing it to 11- 11.1 mbd at best compared with 11.42 mbd for Russia. So the claim that the US has overtaken Russia in oil production is a plain untruth.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London