Oil inched up on Wednesday, supported by hopes that OPEC and allies may deepen their production cuts in December, while weakening global economic and oil demand outlook continues to weigh on prices.
At 11:22 a.m. EDT on Wednesday, WTI Crude was up 1.34 percent at US$53.52, while Brent Crude was trading up 1.19 percent at US$59.44.
Prices steadied early today, after two consecutive days of losses earlier this week, when the ongoing U.S.-China trade dispute and another gloomy economic forecast depressed the price of oil.
On Tuesday, the International Monetary Fund (IMF) slashed, again, its forecast for global economic growth, expecting growth to slow down to its weakest pace since the 2008-2009 financial crisis.
"Growth continues to be weakened by rising trade barriers and increasing geopolitical tensions," the IMF said, noting that "the global economy is in a synchronized slowdown."
This disheartening outlook on global growth weighed on the oil market as participants expect that oil demand growth in the world will further slow down amid weakening economies. Related: What's Behind The Bearish Bias In Oil Markets?
Those demand concerns continue to weigh on the oil prices this week, although some hints from OPEC's chief suggested that the OPEC+ coalition is open to discussing and possibly doing 'whatever it takes' to rebalance the market. All options are on the table, including a deeper cut from OPEC and its allies in December, OPEC Secretary General Mohammad Barkindo said last week.
Later on Wednesday, oil prices will receive another driver for a direction up or down, as the API is reporting its weekly inventory data. Market expectations are that U.S. crude oil inventories rose by 3 million barrels over the last week, according to ING. If this expectation is confirmed, "this would likely put some immediate pressure on the market, in an environment where demand concerns continue to linger," Warren Patterson, ING's Head of Commodities Strategy and Senior Commodities Strategist Wenyu Yao, said on Wednesday.
By Tsvetana Paraskova for Oilprice.com
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Comments
However, OPEC+ should banish the thought of another production cut or deepening existing ones because they will be futile in the current market conditions costing it a loss of market share without bolstering oil prices. By cutting its production or deepening the cuts, OPEC+ will be dealing with the symptoms rather than the disease.
The disease is the glut in the global oil market and the cause of the disease is the trade war between the United States and China. The glut has grown from a relatively manageable one ranging from 1.0-1.5 million barrels a day (mbd) before the war to an estimated 4.0-5.0 mbd.
Furthermore, this big glut has nullified any geopolitical impact on oil prices and also absorbed the loss of more than half of Saudi oil production with hardly a whimper from oil prices other than the initial jump that didn’t last long.
The IMF has singled out the trade war as the one decisive factor affecting the global economy and accounting for 0.8% reduction in global GDP.
An end of the trade war will lead to a deep reduction of the glut and this will enhance global demand for oil and therefore prices.
Therefore, OPEC+ will be making a huge mistake if it decides in its meeting in December to make more production cuts or deepen existing ones as they will prove useless.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London