OPEC sees a “somewhat bearish” outlook for the rest of 2019, even as supplies remain tight in the short run.
In its latest report, OPEC only slightly downgraded its forecast for global oil demand, lowering it to 1.10 million barrels per day (mb/d) for 2019, down only a minor 0.04 mb/d from a month earlier. That estimate could end up being too optimistic, and OPEC itself said the forecast is “subject to downside risks stemming from uncertainties with regard to global economic development.”
Notably, OPEC said that global supply could grow by 1.97 mb/d this year, significantly outpacing demand growth. Still, that figure is down by 72,000 bpd from a previous estimate, due to lower-than-expected production growth in the U.S., Brazil, Thailand and Norway.
In another worrying sign of a brewing supply surplus, OPEC said that oil inventories in OECD countries rose by 31.8 million barrels in June from a month earlier, rising to 67 million barrels above the five-year average. In other words, just as OPEC+ was meeting to extend the production cuts for another 9 months, inventories were rising, an indication of an oversupplied market.
On a slightly positive note (for OPEC), the group revised up demand for its crude by 0.1 mb/d for both 2019 and for 2020. Still, it said that demand for its oil, often referred to as the “call on OPEC,” would drop to 29.4 mb/d in 2020, down from 30.7 mb/d this year.
Based on those numbers, OPEC+ is staring down a serious supply glut next year absent further action. The group can either stick with current production levels and risk another market downturn, or it can swallow further production cuts. Related: Major Setback For EVs Could Delay Peak Oil Demand
What happens next is largely outside of OPEC’s hands. Recent price movements are almost entirely the result of shifting sentiments regarding the global economy. “The yo-yoing on the oil market continues and the oil price remains highly prone to fluctuations. After sliding massively on Wednesday, Brent was hit hard once again [Thursday], shedding over 3% in a matter of hours,” Commerzbank said in a note on Friday. “The oil price currently remains at the mercy of expectations for the global economy, and is thus caught between economic concerns and hopes that the trade dispute might end soon.”
U.S. retail sales eased some concerns on Friday, but the global backdrop remains worrying, and a steady release of data from around the world continues to point in a negative direction. Just in the last week, there was the inverted yield curve for U.S. treasuries, a stock market and currency meltdown in Argentina, volatile oil prices, and widespread fears of a global economic recession. Related: Can Renewable Natural Gas Actually Compete With Diesel?
Even the U.S. is not immune, despite mostly healthy data up until recently. For instance, Wall Street analysts have slashed their outlooks for corporate earnings for the third quarter in recent weeks. “Everyone in April and through the beginning of May thought that the economy was going to get better in the back half of the year, trade war was going to sort of settle, certainly not escalate,” Eastman Chemical Chief Executive Mark Costa said on an earnings call last month, as the WSJ reported. “And now we’re just in a very different world where I don’t think that’s true…There’s not a lot of signs of economic recovery coming in the second half.”
Ultimately, the U.S. will struggle to outrun a global slowdown. The World Trade Organization (WTO) painted a bleak picture for the third quarter, saying that trade volumes are “likely to remain weak.” The global auto sector has been hit hard this year, with a sharp contraction in China, India and Germany. The U.S. auto industry is starting to show some signs of strain as well.
The problem for oil prices is that the outlook for 2020 is already pretty bearish, with supply growth outpacing demand. That’s the base case right now. But the odds of economic recession continue to grow, which threatens to make the supply overhang that much worse.
By Nick Cunningham of Oilprice.com
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The trade war has been creating uncertainty in the global economy and also depressing global demand for oil and, therefore, prices.
As long as the trade war continues, the glut will continue to rise. Therefore, reducing Saudi oil exports and adding more production cuts will be a waste of time leading to a loss of market share by OPEC. Furthermore, they will be dealing with the symptoms rather than the cause of the problem. This will hardly make a dent on the glut until the US and China reach a settlement.
In such a situation OPEC may seem bearish but this situation could change to bullish overnight with any real indication that the US wants to reach a deal with China.
President Trump knows that he has lost the trade war with China and is finding it hugely difficult to admit defeat. He has backed himself into a corner, with only one option open to him now, namely to call off his trade war and negotiate an end to the war on China’s terms. This is too bitter a pill to swallow. That is why he is prevaricating about ending the trade war. But he is eager to get four more years in the White House and without a trade deal his chances are slim. That is why he will swallow his pride and strike a deal with China just before the 2020 presidential elections.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London