Crude oil prices rose on Boxing Day after an extensive decline that saw West Texas Intermediate creep close to US$40 and Brent briefly fall below US$50 a barrel. Today at 09:35 AM ET, the international benchmark had recovered slightly, rising 1.34 percent to US$51.45 a barrel, after shedding as much as 6.2 percent in the previous trading session to close at US$50.47 a barrel, Reuters reports.
Meanwhile, WTI recouped some of the losses suffered over the last few days, trading up 2.61 percent at US$43.64 a barrel at the time of writing, after losing 6.7 percent and closing at US$42.53 a barrel in the last session.
The U.S. Federal Reserve’s decision to increase interest rates one more time before the end of 2018 certainly affected the price of WTI as it raised borrowing costs across industries. However, there is a wider worry among market players in oil and it concerns the global economy. With most authorities forecasting a slowdown in its growth next year, the concern about how crude oil demand will be faring in 2019 is only to be expected.
Stock market volatility is also pressuring oil prices. Bloomberg quoted a Rakuten Securities analyst as saying, “There are several bearish factors in oil markets, and the situation won’t improve anytime soon. The current bear market will likely continue for some time.” Satoru Yoshida added that “oil prices could rise if OPEC+ make announcements about specific measures.” The measures might have to include deeper cuts seeing as the 1.2-million-bpd announced by OPEC+ earlier this month failed to impress a market in turmoil. Related: Lessons From The Oil Markets In 2018
A CMC markets analyst that Reuters spoke to agrees. “$50 is a psychological support level (for Brent),” Margaret Yang said. “But market confidence needs to be restored for oil price...that includes an equity market rebound and/or a bigger production cut from major oil exporters.”
Even deeper cuts might be enough on their own: the U.S.-China trade war continues to worry traders as does the partial government shutdown in Washington that could last quite a bit longer than usual: President Trump said it might have to continue until Congress agrees to his demand for a border wall with Mexico.
By Irina Slav for Oilprice.com
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The first fact 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 fact is that it normally takes a few months before the recently-agreed cuts of 1.2 million barrels a day (mbd) by OPEC+ filter into the global oil market. These cuts should be enough to do the trick.
A third fact is that the global oil demand is projected to add 1.4 mbd to the oil market in 2019.
A fourth fact is that the global economy is projected to grow by 3.8% in 2019.
A fifth fact is that the trade war between China and the US has not dampened in any way China’s thirst for oil with Chinese oil imports already rising above 10 mbd and possibly hitting even 11 mbd early next year.
A sixth fact is that the US manipulates oil prices by falsifying claims about rising US oil production and significant build-up in US crude and products inventories and hiking the value of the US dollar opposite other currencies. To put an end to this malpractice, OPEC members are well advised to cut all their oil exports to the US estimated at 4.7 mbd which have been augmenting US crude oil inventories. They should also adopt the petro-yuan in preference to the petrodollar since 80% of their oil exports go to the Asia-Pacific region particularly China.
Based on the above, I am convinced that bullish sentiments in the market will eventually prevail early in 2019 enabling prices to resume their surge beyond $80 a barrel.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London