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.
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.
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.
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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