Oil prices roared back on Wednesday, rebounding and regaining some of the steep losses suffered in previous trading days. The bounce suggests there are some signs of life in the oil market, or at least a soft floor, despite hitting one-and-a-half-year lows.
Most Wall Street investment banks see oil prices rebounding strongly in 2019, although just about all of them have revised down their oil price forecasts from just a few weeks ago. Bank of America Merrill Lynch, for instance, sees Brent averaging $70 per barrel in 2019. At the bearish end of the spectrum, the EIA sees Brent averaging $61 per barrel – still higher from today’s spot price.
A Wall Street Journal survey of 13 investment banks finds an average predicted Brent price for 2019 at $69 per barrel. That is much higher than current levels, but down from a $77 average predicted price from just a month earlier. The same banks have an average forecasted price for WTI at $63 per barrel.
While the investment banks have been forced to abandon much more bullish forecasts, they also do not see a rerun of the 2016 nadir in which WTI crashed below $30 per barrel. In fact, many analysts see the latest plunge as overstretched. “I think there is a little bit of over-extension to the downside linked to global market fears,” said Olivier Jakob, analyst at Petromatrix, in a Reuters interview.
The OPEC+ cuts have yet to take effect, but when they do, they should start to tighten the market and reduce “the exaggerated pessimism among market participants and allow oil prices to gradually recover,” Eugen Weinberg, head of commodity research at Commerzbank, told the Wall Street Journal.
Still, there isn’t a consensus on this point. Some still see extraordinary weakness in the market, despite Wednesday’s rally. “Right now, I don’t see any cause for price recovery anytime soon unless there is a reversal of the negative momentum of the drop in the equity markets, economic indicators, and really some strengthening of crude oil supply and demand fundamentals,” Victor Shum, VP at IHS Markit, told CNBC. “I think if demand growth falters, we could see Brent prices drop to $40 by the second quarter of next year.”
Shum added that there is some evidence for that bearish demand scenario. “Demand is becoming more concerning to people in the oil industry. We have already seen signs of slowing vehicle sales in China. Diesel consumption is lower than expected in November in India. So, these are troubling signs,” Shum said. “In the meantime, U.S. tight oil supply continues to grow.”
“Fear of a bear market remains in place,” Johannes Gross from JBC Energy told Reuters.
Over the next few months, and perhaps for much of 2019, OPEC+ may have much less influence on the oil market than seemed to be the case prior to the Vienna meeting in December. Instead, the oil market could be at the mercy of much larger economic forces. Specifically, weak economic conditions could subsume the efforts of the OPEC+ coalition, rendering them ineffective at balancing the oil market.
A slowdown in China and Europe, the ongoing U.S.-China trade war, monetary tightening from the Fed, and plenty of political turmoil in the U.S. and Europe – all of these factors stand a good chance of dragging down the global economy. And, of course, there will be a series of unforeseen events in 2019 that will throw up new obstacles.
The OPEC+ cuts have not even started yet and representatives from the group are already talking about extending the deal through the end of 2019.
Ultimately, at least in the near-term, oil prices could move in lock-step with broader financial sentiment. Daily selloffs and rebounds in global equities have become commonplace, and the major oil benchmarks have followed those movements very closely. In other words, when trying to discern what oil prices will do next, one could do worse than simply track the health of the global economy.
Economic growth has always been a key variable influencing the oil market, but with fears of a slowdown growing, especially since much of the fear has spiked only recently, many of the rather optimistic demand forecasts for 2019 could be in doubt.
By Nick Cunningham of Oilprice.com
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