There was a hint that something like this could happen, and now it’s here. When oil prices were spiking at the beginning of last month, hitting four years highs, with global bench mark Brent breaking the psychologically important $85 price per barrel point, and U.S. bench mark West Texas Intermediate (WTI) hitting the mid $70s point, there were predictions that prices could even hit $100 per barrel by late 2018 or the start of next year.
However, there were also projections, though in the minority at the time, that rising prices would create demand destruction - the price point at which consumption starts to taper off due to high oil costs. Demand destruction has been an on and off again problem for oil producers, particularly Saudi Arabia and OPEC for decades, while it’s a market problem that a Saudi led OPEC has often mismanaged in its attempt to micro-manage oil markets. Admittedly, predicting when demand destruction will kick in is anything but an exact science.
Prices continue downward trajectory
Fast forward ahead just a month and oil prices are continuing their downward spiral, giving credence to those that demand destruction, amid a strong U.S. dollar that makes oil more expensive for importing countries, weakness in emerging markets, and global equity markets, would ensue.
WTI crude futures closed down Tuesday at a seven month low, after an industry report showed a larger-than-expected increase in U.S. crude inventories, a bearish development for U.S. oil prices. Crude oil futures fell after industry watchdog American Petroleum Institute (API) reported U.S. crude stockpiles expanded by 7.83 million barrels last week. It’s the largest build in five weeks, compared with an average 2 million-barrel increase in a Bloomberg survey of analyst forecasts.
Expanding oil inventory levels are obviously bearish on oil prices and suggests that not only is production going strong, but that demand could be waning. On Tuesday, the U.S. Energy Information Administration (EIA) projected that U.S. crude production will average 12.06 million bpd in 2019, passing the 12 million bpd milestone much sooner than expected, largely on the back of increased shale oil production from the Permian basin. In 2019, the EIA said it expected production to increase 1.16 million bpd from the prior year, up from the previous 1.02 million bpd earlier forecast. Related: Why Oil Prices Will Fall In 2019 And Beyond
Prices also trended downward on Tuesday and early Wednesday on news from a few days earlier that the Trump administration had granted a 180-day waiver to eight countries, including India, China, and Japan, over their oil imports from Iran. Critics claimed that Trump backed down from his previous harsh rhetoric over Iran, while some claim that it was a political move, to put downward pressure on oil prices, taken just days before Americans headed to the polls in mid-tern elections on the 7th. Iran, however, took no consolation from Trump’s waiver move, and pledged that fresh sanctions against its oil sector, reimposed on the 4th, would not be successful.
Tehran said on Tuesday it had so far been able to sell as much oil as it needs despite U.S. pressure, but it also urged EU members that oppose sanctions to do more to help the Islamic Republic. However, that appeal may fall on deaf ears after several European states accused Tehran last week of mastering minding a political assassination on Danish soil. The Danish intelligence chief, Finn Borch Andersen, said on Tuesday that the alleged murder plot had targeted the exiled leader of the Arab Struggle Movement for the Liberation of Ahvaz (ASMLA), a separatist group that has a history of carrying out attacks in Iran. “We are dealing with an Iranian intelligence agency planning an attack on Danish soil. Obviously, we can’t and won’t accept that,” Andersen said.
These factors all indicate that global oil markets are now in a state of confusion. Will there be a supply glut due to weakened demand from a stronger dollar, ongoing trade tensions between Washington and Beijing, which will see major producers trim production to once again support prices? Or, will Washington and Beijing reach some sort of trade agreement, the dollar loses some of its upward momentum, creating relief for emerging markets and stoke more oil demand going forward? Likely, these answers will unfold more clearly after the holiday season and the start of the New Year.
By Tim Daiss for Oilprice.com
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