• 3 minutes 2nd Annual Great Oil Price Prediction Challenge of 2019
  • 6 minutes "Leaked" request by some Democrats that they were asking Nancy to coordinate censure instead of impeachment.
  • 11 minutes Trump's China Strategy: Death By a Thousand Paper Cuts
  • 14 minutes Democrats through impeachment process helped Trump go out of China deal conundrum. Now Trump can safely postpone deal till after November 2020 elections
  • 24 mins Shale Oil Fiasco
  • 6 hours USA v China. Which is 'best'?
  • 16 mins Everything you think you know about economics is WRONG!
  • 6 hours Wallstreet's "acid test" for Democrat Presidential candidate to receive their financial support . . . Support "Carried Interest"
  • 2 hours My interview on PDVSA Petrocaribe and corruption
  • 15 hours Wonders of US Shale: US Shale Benefits: The U.S. leads global petroleum and natural gas production with record growth in 2018
  • 7 hours Quotes from the Widowmaker
  • 1 day True Confessions of a Billionaire
  • 6 hours Global Debt Worries. How Will This End?
  • 13 hours Petroleum Industry Domain Names
Alt Text

Iraq In Crisis As Oil Is Threatened

Both the U.S. and Iran…

Alt Text

Lower Oil Prices Fail To Stop U.S. Shale Growth

U.S. shale growth doesn’t appear…

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. 

More Info

Premium Content

Oil Will Go ‘’Bust’’ If Recession Hits

Oil prices plunged again on Thursday, dragged down by fears of slowing demand.

An unexpected increase in inventories underscored the downside risk to oil prices. The EIA reported a drawdown in crude stocks, but a huge 9.25 million barrel combined increase in gasoline and diesel inventories, which surprised traders. Also, gasoline demand plunged by 0.5 mb/d in the week ending on July 12, although week-to-week changes are typical and make the data a bit noisy.

Crude prices sold off on the news, falling by nearly 3 percent on Thursday.

The data release renewed fears of a slowdown in demand. But cracks in U.S. demand are larger than one week’s worth of data. “The [year-on-year] increase in demand for the year to 11 July was just 29 thousand barrels per day (kb/d), up 0.1%,” Standard Chartered wrote in a note. “Demand will have to be strong for the rest of the year if consensus forecasts for 2019 growth are to be achieved.” The investment bank sees U.S. oil demand only rising by 89,000 bpd this year, while the EIA expects a stronger 248,000-bpd increase. Standard Chartered says U.S. oil demand “appears consistent with a slowing economy.”

The worrying thing for the oil market is that the U.S. economy has held up better than elsewhere. In China, GDP growth has slowed to its weakest pace in nearly three decades. India, which is widely seen as the most important source of oil demand growth in the medium- and long-term, has also disappointed. Related: Iran’s Tactical Move To Skirt Sanctions

The International Energy Agency (IEA) said that global oil demand only grew by 0.45 mb/d in the second quarter. That contributed to a surprise 0.5 mb/d supply/demand surplus in the second quarter. As recently as June the IEA anticipated the oil market would see a 0.5 mb/d deficit.

The agency said that there were many reasons for tepid demand in recent months. “European demand is sluggish; growth in India vanished in April and May due to a slowdown in LPG deliveries and weakness in the aviation sector; and in the US demand for both gasoline and diesel in the first half of 2019 is lower year-on-year,” the IEA wrote in its July Oil Market Report.

Nevertheless, the IEA stuck with its full-year forecast for demand growth at 1.2 mb/d, arguing that economic growth would rebound in the second half of 2019. Some of that optimism hinges on a resolution to the U.S.-China trade war, which seems a bit speculative. Reports suggest that trade negotiations are “stalled” while the Trump administration wrestles with how to handle Chinese tech giant Huawei. The Trump-Xi meeting on the sidelines of the G20 conference in June was supposed to lead to a restart in trade talks, but as the Wall Street Journal reports, no meetings have been scheduled as of yet. The WSJ also said that the Trump administration “appears to have resigned itself to a drawn-out battle.”

That certainly calls into question the optimism surrounding the IEA’s demand growth figures. “Both IEA and EIA remain optimistic in assuming an economic rebound in 2H19 and see global demand growth nearly tripling from ~0.6 mb/d y/y in 1H19 to ~1.5-1.8 mb/d y/y in 2H19,” said Allyson Cutright, Senior Analyst at Rapidan Energy Group. “While we do see some pickup in 2H19, in particular in China due to macroeconomic stimulus and eased restrictions on gasoline-cars, the overall trend in agency revisions is still probably headed down.”

Weak demand and rising supply are creating a perfect storm heading into 2020. The IEA said that the “call on OPEC” could fall by 0.8 mb/d next year, and even that is based on the agency’s rather optimistic demand growth figures. Related: OPEC’s Oil Giants Give Trading Houses A Run For Their Money

As a result, OPEC+ has a serious problem on its hands. On the one hand, it can continue to cut production in order to prevent oil prices from collapsing. But that would require mustering up consensus and taking on deeper sacrifice. The alternative is not much better. OPEC+ can keep the current production cuts in place (or abandon them altogether) and let prices crash.

“Our balances have long assumed OPEC+ would have to extend and deepen cuts next year and project Saudi Arabia will be the brunt of the additional cuts,” Allyson Cutright of Rapidan Energy Group said. “Our most recent update sees Saudi Arabia need to cut production toward the low-9 mb/d range next year, and that's assuming decent economic growth.”

Rapidan is betting that OPEC+ will opt for cutting, which might be just enough to head off a price slide. “However, if a recession develops or US sanctions on Iran are removed, then the deluge of new oil would more likely prove too large for OPEC+ to manage and oil prices would bust,” Cutright said.

By Nick Cunningham of Oilprice.com

More Top Reads from Oilprice.com:




Download The Free Oilprice App Today

Back to homepage



Leave a comment
  • Mamdouh Salameh on July 19 2019 said:
    Neither oil will go bust nor will recession hits. If oil process declined in the last three days it is not because of an unexpected increase in US inventories of gasoline and diesel as the global oil market has discounted such claims from the EIA long time ago. The decline is because of a feeling in the global oil market that tension between Iran and the United States has been
    de-escalating.

    Moreover, the trade war between the United States and China is still casting dark clouds on the global oil market creating uncertainty and depressing global oil demand and therefore oil prices.

    And yet, the fundamentals of the global economy are still robust with the global oil demand projected to add 1.2 million barrels a day (mbd) this year over 2018 and China’s oil imports soaring and projected to hit 11 mbd this year. Furthermore, the Chinese economy is growing by a very healthy 6.2% in 2019. This is spectacular for the world’s largest economy based on purchasing power parity (PPP) when compared with a 2%-2.5% for the United States and a 1.5%-2% for the EU.

    The end of the trade war is nigh because President Trump has no alternative but to end it as it is hurting the US economy far more than China’s. This is because China’s economy is 28% larger than the United States’ and far more integrated in the global trade system than America’s thanks to China’s Belt & Road Initiative. That is why China’s economy can take more punishment than America’s.

    China has shown its mettle during the trade war when President Trump blinked first by easing restrictions on Huawei, the Chinese tech giant, in a bid to get trade talks moving again.

    Washington had earlier announced a ban that restrict Huawei’s ability to do business with US firms due to national security concerns.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • Hugh Williams on July 21 2019 said:
    It is not news that gasoline consumption falls after the July 4th holiday. The US economy needs cheap oil and the US government controlled agencies do their bit to talk the price down.
  • Rudolf Huber on July 26 2019 said:
    A recession will come - it has long been in the cards and the longer it takes for it to materialize, the harder it will be. What will happen then? Oil producers with high price production will be hit hardest - especially those with little option to cut cost. This will throw a wrench into many Russian oil projects as they are in the very deep Arctic which is a high price frontier. It will also put some Saudi EOR dependent fields in a bind as their marginal cost of keeping the pumps running will be too high to keep them on. And anyhow, as they need to cut deeper, they might use that as an excuse to switch those off. Which does not help with paying for the CAPEX spent but hey, it's a crisis. We are going into an "everyone for himself" and shale will be hit as well. There will be blood - but they have managed to get by so far when the weather was anything but fair so they will soldier on and wait it out ...
  • Nelson Abdala on September 29 2019 said:
    Mr. Cunningham,

    With the future moving towards renewable-clean energy do you think the big oil companies will adapt and invest in clean energy to hedge lower demand in oil and gas?

Leave a comment




Oilprice - The No. 1 Source for Oil & Energy News
Download on the App Store Get it on Google Play