Despite a slight recovery in oil prices on the last day of 2018, benchmarks are set for their first overall annual decline since 2015, Reuters reports, noting since the start of trading in Asia today, Brent crude and West Texas Intermediate had gained around 1 percent each.
There seem to be too many uncertainties around oil for a stronger recovery, after prices began sliding in early October, after earlier this year rallying to above US$80 a barrel for Brent, albeit briefly. Concern about global economic growth and the next moves in the U.S.-China trade war are among the top factors at play. OPEC’s latest decision to begin cutting production from January is also a consideration, although the price trends from the past couple of months suggest the market was disappointed with the level of cuts.
President Trump has indicated a deal with China may be in the works, but uncertainty will likely persist until the moment such a deal is announced. A trade deal between the world’s biggest oil producer and one of the biggest consumers would certainly be bullish for oil, as would an improved global economy outlook – also related to a deal between the United States and China.
In fact, despite this year’s overall loss, crude oil benchmarks are seen by investment bank analysts to soon start rising. A Bloomberg survey among analysts suggests sentiment will change in the new year, with the consensus on Brent crude at US$70 a barrel.
According to the participants in the survey, demand for oil will remain strong in 2019, OPEC’s cut’s will work to prop up prices, and production losses in Venezuela and Iran will strengthen the bullish effect.
“We could even see something similar to a V-shaped recovery next year, on two very important conditions,” said Barclays’ Michael Cohen, adding the conditions were “One, that the reduction in Opec exports leads to a reduction in inventories. And two, that we don’t see a further deterioration in macroeconomic conditions.”
By Irina Slav for Oilprice.com
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My projection is based on the following indications in the global oil market. The first is that Saudi Arabia will do whatever it takes to get oil prices above $80 a barrel since it wants to avoid another ordeal like the one that followed the 2014 oil crash and also because it needs an oil price higher than $80 to balance its budget. This means that it will be prepared to cut its production drastically in support of oil prices.
The second indication is that it normally takes a few months before the recently-agreed cuts of 1.2 mbd by OPEC+ filter into the global oil market. These cuts should be enough to do reduce the glut in the market.
A third indication is that the trade war between the US and China could be coming to an end since it has now dawned on President Trump that he can’t win a trade war with China. Moreover, it has been hurting the US economy far more than China’s.
A fourth indication is that the growing cooperation between Saudi Arabia and Russia who between them account for 27% of global oil production and also 27% of global oil exports according to the 2018 OPEC Annual Statistical Bulletin will continue. These two oil titans are determined to bolster oil prices.
A fifth indication is that China’s crude oil imports which rose above 10 mbd in 2018 even during the trade war with the US could hit 11 mbd early next year.
A sixth indication is that OPEC members particularly Saudi Arabia could take measures to mitigate US manipulation of oil prices which has recently been exposed to the world by Russia suggested that there is a link between the recent slump in oil prices and the interest rate hikes of the dollar by the US Federal Reserve. This confirms what I have been saying for ages in my replies to articles posted on the oilprice.com.
To mitigate the impact of such malpractice, OPEC members could consider reducing if not cutting altogether all their oil exports to the US estimated at 3.2 mbd which have been augmenting US crude oil inventories. They could also adopt the petro-yuan in preference to the petrodollar since 80% of their oil exports go to the Asia-Pacific region particularly China. It is possible that Russia may lean on Saudi Arabia to drop the petrodollar and adopt the petro-yuan instead.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London