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Nick Cunningham

Nick Cunningham

Nick Cunningham is an independent journalist, covering oil and gas, energy and environmental policy, and international politics. He is based in Portland, Oregon. 

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Has Oil Hit Rock Bottom?

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.

Related: The Battle To Control Russia’s Pipelines

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.

Related: ExxonMobil Faces Off With Venezuela’s Navy

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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  • Brian Bresee on December 27 2018 said:
    $45/barrel WTI, the average price for US producers to break even, is the soft bottom for oil. These producers have loans and overhead that will not change much with a slowing economy, which means it is $45/barrel or bankruptcy, AKA a forced reduction in production which will support prices. A simple understanding of market forces at work.

    Any talk of $30/barrel Brent, short of a US currency collapse and reset on their currency, is far from realistic.
  • Mamdouh G Salameh on December 28 2018 said:
    2019 will see a spactacular rebound in oil prices with oil prices going beyond $80 a barrel. This will be underpinned by robust global oil market fundamentals which have maintained their robustness despite a bunch of fickle analysts and investor bankers trying to talk them down.

    Oil prices hit $87 a barrel in the third week of November before they strated their slump. It wouldn’t have been lost on avid observers of the gobal oil market like me and Saudi oil minister Khalid al-Falih that the slump coinicided with the re-introduction of US sanctions on Iran in November. It was an instinctive reaction by the global oil market to realize that the sanctions have not cost Iranian oil exports the loss of even a single barrel and therefore, there will be no supply deficit at a time when the overwhelming majority of so-called anaylsts and investor bankers were anticipating a loss of 500,000 barrels a day (b/d) to 1.5 million barrels a day (mbd) out of an estimated Iranian oil exports of 2.2 mbd.

    Moreover, the global oil market has also realized that the issuing of US sanction waivers to eight countries who didn’t need them in the first place and who would have continued to buy Iranian crude with or without waivers was no more than a fig leaf used by the Trump administration to mask their own inability to achieve their zero exports initiative and the failure of the sanctions.

    The so-called analysts and investor bankers also missed the fact that even when oil prices hit $87 a barrel,the global oil market has never re-balanced completely and that there was a small bit of glut in the market which was augmented by Saudi Arabia’s wrong decision (under pressure from President Trump) and Russia’s (may be to keep the Saudis company) of jointly adding 650,000 b/d to to the market.

    Based on the above, I project that oil prices will not only stabilize but we will soon see a resurgence. My projection is underpinned by the following facts in the market.

    The first is that Saudi Arabia will do whatever it takes to get oil prices above $80 a barrel since it wants to avoid another ordeal like the one that followed the 2014 oil crash and also because it needs an oil price higher than $80 to balance its budget. This means that it will be prepared to cut its production drastically in support of oil prices.

    The second fact is that it normally takes a few months before the recently-agreed cuts of 1.2 mbd by OPEC+ filter into the global oil market. These cuts should be enough to do the trick.

    A third fact is that while the trade war between the US and China has created uncertainty in the global economy, it hasn’t dampened China’s thirst for oil with Chinese oil imports already rising above 10 mbd and possibly hitting even 11 mbd early next year.

    A fourth fact is that OPEC+ is going from strength to strength particularly with the growing cooperation between Saudi Arabia and Russia who between them account for 27% of global oil production and also 27% of global oil exports according to the 2018 OPEC Annual Statistical Bulletin. These two oil titans are determined to bolster oil prices. And while Saudi Arabia needs an oil price far above $80 to balance its budget, Russia can live with an oil price of $40 or even less. Still, a slump in oil prices could adversely affect the exchange rate of the ruble against the US dollar, inflation and also budget plans according to Russia’s oil minister Alexander Novak. Moreover, Russia’s cooperation with OPEC has earned it not only economic and geopolitical dividends but has also earned the Russian budget an additional US$120 bn in the last two years.

    A fifth fact is that US manipulation of oil prices has been exposed to the world yesterday by Russia when Igor Sechin, the powerful head of Russian oil giant Rosneft suggested that there is a link between the recent slump in oil prices and the interest rate hikes of the dollar by the US Federal Reserve. This confirms what I have been saying for ages in my replies to articles posted on the oilprice.com.

    To put an end to this malpractice, OPEC members are well advised to cut all their oil exports to the US estimated at 3.2 mbd which have been augmenting US crude oil inventories. They should also adopt the petro-yuan in preference to the petrodollar since 80% of their oil exports go to the Asia-Pacific region particularly China.

    It is possible that Russia may lean on Saudi Arabia to drop the petrodollar and adopt the petro-yuan instead.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London

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