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From a two-month high of $64.6 a barrel earlier this week driven by some optimistic noises about the US-China trade deal (even if partial). Brent has come under pressure (a tad below $ 64 a barrel on Friday) following a spate of profit-taking based on the rising US inventory.
Oil production in the US has continued to expand and now stands at a record level of 12.9 million barrels a day. Production and trade data suggest that the US is now nearing self-sufficiency. and arguably. it is the world’s largest oil producer and significant exporter.
Also. the optimism relating to a Phase One agreement between the US and China is beginning to fade. President Trump’s latest action (signing of Bill on human rights) relating to Hong Kong has upset the Chinese no end and it is sure to reflect on trade talks. In other words. the upside recently seen in Brent is doomed to be short-lived. The fact that most of the world’s major economies are still in the throes of a slowdown continues to weigh on the energy market. After all. the positive relationship between economic growth and energy consumption is well recognised. Although 2020 may witness a slightly higher global growth (possibly 3.4 percent versus 3.1 percent in 2019). concerns over slowdown in Japan. Europe and China cannot be wished away.
Given the current market conditions and outlook for 2020. next week’s meeting of OPEC and OPEC+ assumes crucial importance and is awaited with great interest. Saudi Arabia is keen that oil prices rise further and is pitching for output cuts going till mid-2020. Saudi Arabia is also keen on further output cuts and an agreement on that is to be reached in next week’s meeting itself. Clearly. unless there is additional output cut. the first half of 2020 is sure to witness an oversupply situation with concomitant bearing on prices. International Energy Agency has predicted a massive surplus in the first half of next year.
Russia’s stand
However. for all intents and purposes. there is no question Russia is going to agree to any further production cut. As it is. oil producers in Russia are not happy with the existing output cut and are keen the agreement does not last beyond the pre-agreed deadline of March 2020. Data suggest Russia has been producing more than what it had agreed to during the course of this year.
In other words. next week’s meeting may find Russian pro-production views pitted against producers such as Saudi Arabia. It is not beyond imagination that if push comes to shove. Russia may even opt out of the agreement.
On their part. speculative long position holders are now beginning to exit their positions. putting downward pressure on prices.
So. brace for further correction in crude oil prices next week. What can potentially save the situation is a stronger signal of détente between the US and China. an unlikely happening in the context of Hong Kong.
