Oil prices collapsed on Tuesday for the second time in a week. During midday trading, WTI fell below $55 per barrel and Brent dropped below $65 per barrel. Both benchmarks are off more than $20 per barrel from their October highs.
“Oil prices are under pressure in the face of ample supply, falling stock markets and an increasingly gloomy economic outlook,” Commerzbank said on Tuesday.
Tuesday also saw a plunge in global equities, which is dragging down all sorts of different sectors, including oil prices. “I think you’re going to see a risk-off type of market,” Tariq Zahir, a New York-based commodity fund manager at Tyche Capital Advisors LLC, told Bloomberg. “It wouldn’t be surprising to see new lows being printed on oil” if crude stocks rise sharply. U.S. crude oil inventories likely rose by 3.5 million barrels last week, a sign that the surplus continues to build.
In fact, concerns about a supply glut are growing by the day. The IEA said in its November Oil Market Report that the global surplus could average 0.7 million barrels per day (mb/d) in the fourth quarter.
On the one hand, the meltdown in prices significantly increases the odds that OPEC+ will agree to curb supplies. Saudi Arabia has already announced production cuts on the order of 500,000 bpd for December. Russia has been non-committal, but it would seem likely that the group would agree to curb production to stop the slide in prices. After all, the originally supply cut announced at the end of 2016 was intended to put a floor beneath prices. The group wouldn’t want to see prices crash all over again. Related: Oil Companies Lose $1 Trillion As Prices Crash
“In our view there is no doubt that production needs to be cut,” Commerzbank said. “This is also illustrated by the IEA’s latest estimates, which point to a massive oversupply on the global oil market next year if OPEC production remains unchanged.” The IEA says the current 0.7 mb/d surplus could balloon to 2 mb/d in the first half of 2019 based on the market’s current trajectory. This situation is putting a lot of pressure on OPEC+ to take action next month.
On the other hand, some analysts and traders are growing concerned that OPEC+ could stage a repeat of the 2014 meeting. If one could pinpoint a single moment in time that crystallized the oil price meltdown between 2014 and 2016, it was the 2014 OPEC meeting. The market was caught off guard by the decision by the group not to cut production in the face of a mounting surplus. The result was a steep selloff that continued more or less for the next two years.
Now, investors are concerned that the same thing might happen again in two weeks in Vienna. Market watchers are mostly convinced that OPEC+ will cut production, especially since the Saudis are keen to slash output. Related: The Impending Endgame In Oil Markets
But Bloomberg reports that investors are scrambling to secure positions that protect them from a deeper downturn. “Recall oil prices, which had already fallen 29 percent going into the November 2014 OPEC meeting, fell another 10 percent the day after the meeting and were down 25 percent the month after as OPEC disappointed on supply cuts,” Mandy Xu, chief equity derivatives strategist at Credit Suisse, wrote in a note Monday.
Meanwhile, the head of the IEA, Fatih Birol, warned that a production cut could hurt the global economy because of higher prices. He also lamented low spare capacity. These comments are a bit odd and contradictory since cutting production would allow OPEC to rebuild spare capacity.
However, Birol was entirely correct on another account. “The name of the game in the oil market is volatility,” IEA executive director Fatih Birol said at a conference in Oslo. “And with the increasing pressure of geopolitics on oil markets that we are seeing, we believe that we are entering an unprecedented period of uncertainty.”
Crude oil prices have entered a highly volatile phase. Prices fell 7 percent on November 13, and plunged again on Tuesday. The odds are still pretty high that OPEC+ agrees to supply cuts in December, but it isn’t clear that volatility is going away anytime soon.
ADVERTISEMENT
By Nick Cunningham of Oilprice.com
More Top Reads From Oilprice.com:
- Is It Too Late To Avoid An Oil Supply Crisis?
- The Oil Industry Is Facing A "Capex Conundrum"
- How To Play A Recovery In Oil Prices?
The global oil market fundamentals are still as robust as in October when oil prices hit $87 a barrel. The market has had a small pocket of glut then capable of taking care of outages by Venezuela and others. It is true that the small glut may have increased a bit recently by Libya lifting its oil production to 1.2 million barrels a day (mbd) from 900,000 barrels a day (b/d) three months ago.
Oil prices are volatile by nature given the various economic and geopolitical pressures they come under virtually on daily basis. That is why one shouldn’t be surprised to see oil prices shuttling between bull and bear markets all the time.
I am convinced that oil prices will soon resume their surge upwards buoyed by very robust market fundamentals and Chinese oil imports which have been breaking records in recent times.
Under the OPEC/non-OPEC production cut agreement, 1.8 mbd were cut to bolster the price. Then a month and half ago Saudi Arabia (under intense pressure from President Trump to save his neck in the Congressional midterm elections in November) added 400, 000 b/d to the market and Russia (for its own reasons) added 250,000 b/d, a total of 650,000 b/d. That was a grave mistake because it enhanced the pocket of glut I referred to earlier. Still, President Trump lost control of the US House of Representatives.
OPEC doesn’t have to cut production in its meeting in December. A better idea is for Saudi Arabia and Russia to withdraw the 650,000 b/d they added to the market and return them to the previous 1.8 mbd cut under the OPEC/non-OPEC agreement. Whether you want to call it a new production cut or a reversal of an earlier mistake, I leave this up to you.
The news that oil companies have lost an estimated $1 trillion since the oil began its latest slide over a 40-day period since October demonstrate the importance of high oil prices to the global economy.
I have always argued that a fair price for oil ranges from $100-$130 a barrel. Such a price is good for the global economy since it invigorates the three biggest chunks of the global economy, namely, global investments, the economies of the oil-producing nations and the global oil industry.
And despite claim by the International Energy Agency (IEA) that global glut could average 0.7 mbd in the fourth quarter, the IEA and its chief are claiming that any fresh cuts by OPEC to bolster the oil prices could have negative effects on the oil market. The IEA chief and and his organization must be living on a different planet and must therefore have forgotten the huge damage the 2014 oil price crash has inflicted on the global economy particularly the economies of OPEC members and the loss of hundreds of billions of global investments. It would be better if the IEA and its chief stop pontificating on oil prices and oil market as their utterances have been branded biased and discredited a long time ago.
Still, the recent slumping of oil prices proves abundantly clear that US sanctions against Iran have so far failed to dislodge even one single barrel from Iran’s oil exports. That is despite the fact that the global oil market has been bombarded for months prior to the sanctions by projections including IEA’s that the sanctions will cost Iran’s oil exports some 500,000 b/d to 1.5 mbd.
Furthermore, the issuing of 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 the waivers is the clearest admission by the Trump administration that their zero option is out of reach and that sanctions are doomed to fail. Moreover, the eight recipients of the waivers have neither increased nor decreased their purchases of Iranian crude as a result of the waivers.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London