At the beginning of the week, the WTI oil price broke below the psychologically-important level of USD 50/b and is currently trying to stabilize in the mid-USD 40s.
What has happened?
At the beginning of the week, the WTI oil price broke below the psychologically-important level of USD 50/b and is currently trying to stabilize in the mid-USD 40s. The oil price has been volatile in recent months, falling from levels above USD 75/b in early October, before an intermediate attempt to stabilize around price levels of USD 50/b end of November and then a breaking below this level to USD 46/b as of today. As a result, the oil price has fallen around 40% over the last few months.
This week’s price fall has been caused by two factors in our view: first, increasing concerns around the level of future demand in a more cloudy global economic outlook and, second, signs that U.S. oil production has not been slowing. After a relatively strong increase in U.S. inventories in October and November, the inventory drag in December seems low in comparison to previous years and could increase.
WTI crude oil appears to have become less attractive for financial investors as well. Due to the sharp price falls, short-term futures prices like the 1 month future have fallen below futures prices with longer maturities like the 12 month future. The difference between these two maturities had averaged + USD 3/b over most of the year (in market terminology, “backwardation”), but has been negative since end of October (“contango”), now standing at -USD 3/b.
In the short term, the oil price now seems likely to stay close to current price levels of around USD45/b. Where exactly it will find the bottom will probably be influenced by weather effects in January and February and by evidence of the extent of the expected ramp-up in inventories. We still expect the global economy to grow at a decent (if slightly slower) pace, which should be one of the most important positive drivers of oil demand.
On the oil production side, we need to see a disciplined production approach from OPEC. October data showed an OPEC production of 33 m b/d and OPEC and Russia will need to have to cut output from this level. At the OPEC meeting on December 7, OPEC and Russia confirmed a cut in output of 1.2 m b/d: if achieved, this should help bring supply and demand closer to balance. However, another factor is U.S. oil production. The U.S. Department of Energy reported early December that the U.S. was producing 11.6 m b/d, nearly a million barrels more than a year ago. The big question is to what extent lower global oil prices will discourage U.S. production. Although U.S. producers have become more efficient, the initial effects of the recent oil price fall on U.S. production may be evident in negative earnings revisions of U.S. oil companies in the upcoming reporting season, starting in January.
From the perspective of financial investors, recent data show that non-commercial net long positions in the futures markets have been reduced significantly suggesting that oil price dampening effects from this source could be reduced. Market positioning now seems to be getting closer to levels where it could turn into a supporting factor.
Given these factors and our overall expectations for the global economic outlook and the oil demand and supply balance, we continue to expect some upside for oil markets over the next 12 months, with an end-2019 forecast of USD 65/b.
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