After touching multi-year highs in October this year, oil is currently down nearly 40 percent in an unexpected slide.
Brent Crude futures are currently down 6.22 percent to $50.47 a barrel, while WTI crude futures are down by 6.71 percent to $42.53 a barrel (as of 11:35 am Riyadh local time on Tuesday).
Hedge funds and market observers have continued to wind down their speculative net long positions on oil, amid concerns of potential global market oversupply in coming months. Analysts expect this momentum to force the global economy to hit the brakes harder.
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Shale vs. OPEC
While rising shale oil production in the US has put pressure on prices, US shale producers will be hurt the most if prices remain low.
This is because below $50 per barrel, the shale boom will likely cool as shale oil producers will find it tough to attract investment at this price point.
“In most parts of the shale regions, prices have dropped below this threshold and there are first indications about companies cutting their capital expenditures,” said Norbert Rücker, Head Macro & Commodity Research, Julius Baer.
The Iran oil embargo, Rücker said, has been put on hold only temporarily and forcing Iranian oil trade down to zero will drain supplies later next year.
“Today’s oil prices are nearing our bear case for oil, i.e. the oil market seemingly sees high chances of the global economy hitting the breaks harder than perceived,” he added.
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Oil demand to rise in 2019
As shale producers are about to partially close their oil taps, the more serious issue is continued concerns over supply and the global economy. All of these factors keep oil prices under pressure.
According to OPEC’s monthly oil market report for December 2018, the global economic growth forecast remained unchanged at 3.7 percent for 2018, and is expected to slow further at 3.5 percent in 2019.
But, the good news is that OPEC expects world oil demand to rise by 1.29 million barrels per day (mbd), taking the total world oil demand is to 100.08 mbd. This, coupled with the OPEC producers and allies reaching a deal in early December to reduce output by 1.2 mbd, is expected to prop up the price in 2019.
“The announced production cuts by OPEC and Russia will contribute to more balanced global supply and demand, and help to stabilize oil prices,” Moody’s noted in its latest Oil & Gas Outlook 2019 report.
As a result of the signed deal, Russia agreed to reduce oil production by 2 percent from the level of October 2018, that is, by about 228,000 barrels per day.
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According to Russian TASS news agency, Russia is expecting from January 2019 to evenly reduce oil production - a month by about 50,000-60,000 barrels per day compared to the level of October of the current year.
“We see the OPEC+ production cuts, along with ongoing supply declines in Iran and Venezuela amid healthy oil demand, supporting higher prices,” said Giovanni Staunovo, analyst, UBS Wealth Management.
Taking supply and demand dynamics into account for next year, Brent prices will recover into a $70 – 80 a barrel range next year, he added.
Write to Sunil Kumar Singh at sunil.kumar@argaamplus.com
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