When oil prices surged to over $80 a barrel last year, some of the more optimistic analysts and commodity traders predicted oil would touch highs of $100 a barrel by year-end.
But it hasn’t worked out that way.
Trade tensions and slowdowns in major economies have hammered the value of oil. Prices are down roughly 25 percent on last year and trading at $59 a barrel as traders and market participants fret over future demand.
Analysts and regulators predict that low prices will continue into next year, a result of slowing oil consumption and rising global crude inventories.
Jeffrey Halley, who covers a wide group of asset classes for Singapore-based Oanda group, told Al Arabiya English that oil consumption will continue to drift lower, with a structural breakthrough “unlikely.”
While further OPEC cuts or global events could lead to the price of oil rising again, it is likely that a weak global outlook and fears over demand will push the price even lower.
Weak global outlook
The industry’s worst fears were confirmed on October 10 when OPEC forecast a fall in world oil demand for the end of 2019, citing a deteriorating outlook on the global economy.
OPEC, which in the past has implemented output curbs to boost prices, expects demand growth from China, the world’s biggest importer of the commodity, to be at 2.4 percent in 2020, down from 2.8 percent last year.
China’s overall economic growth is projected to slow this year, according to the World Bank. OPEC’s other big customer, India, is facing a slowdown with industrial output declining for the first time in more than two years.
Outside of Asia, the outlook is equally concerning. In the US, several economists and hedge fund managers have sounded an alarm on the economy, with some raising the possibility of a recession in the next few years.
Fears over demand
A prolonged trade war between US and China has cast a shadow over the demand for billions of dollars worth of goods around the world, including oil. In their latest meeting, the two countries chalked out a partial trade deal that raised hopes for an end to the trade tensions, but the outcome is far from certain.
“The importance of a trade deal between the US and China is the difference between it being a healthy and natural slowdown, or a full-blown recession,” Halley said.
Trade tensions once again took the centerstage for oil markets on Monday. China is now seeking $2.4 billion in retaliatory sanctions against the United States for non-compliance with a WTO ruling in a tariffs case dating back to the Obama era, a published document showed.
The extent of demand fears was on show after the September attacks on key Saudi Arabian oil installations, which knocked offline about 5 percent of the world’s crude oil supply. Immediately after the attacks, Brent crude surged 20 percent in early trading, but eased back to end at $69 a barrel. It is currently trading a dollar below the pre-attack level.
Despite the global importance of the attacks, prices were back within days. In contrast, in 2018, sanctions on Iran disrupted supply and pushed oil prices past $85 a barrel, with US President Donald Trump taking to twitter to demand lower prices from OPEC.
Although Saudi Aramco’s swift response was one factor in why oil prices came down so quickly this time, OPEC identified global factors as keeping prices low. According to OPEC, investors were “cautious amid high uncertainty regarding the global economy, oil demand and the ongoing trade dispute between US and China.”
Oil price rises unlikely
There is some chance of a rise in oil prices. A return to $70 to $80 oil price is possible if OPEC and Russia pull out aggressive new output cuts and stick to them.
OPEC and its allies introduced production curbs at the end of 2016, rescuing the global oil industry from the depths of a downturn. OPEC+ has been cutting back 1.2 million barrels per day of output since 2017.
Prices could also be boosted by any increase in tensions in the Strait of Hormuz, the gateway for a fifth of global oil shipments, which Iran has threatened to disrupt.
However, a sustained rally in prices “requires shots fired directly from both sides,” Halley explained to Al Arabiya English.
“Only a few scenarios could change this dynamic,” he added.
Instead, a buildup of oil inventories could force prices even lower. Currently, oil prices are expected to range anywhere between $60 to $65 for a barrel in 2020.
Earlier this month, Russian President Vladimir Putin bemoaned excess oil stocks that have held up prices. In a recent interview with Al Arabiya, Putin said global crude reserves needed to be cut to a “sensible level.”
The world’s inventories may initially rise in 2020, according to the US government, which has also cut next year’s average oil price expectation to $60 a barrel from $62 on the back of “increasing uncertainty” in global markets.
Reflecting on the various factors at play, Halley sounded a pessimistic note.
“No matter which way you cut the cake, it is hard to make a strong bullish case for oil over the next quarter or through 2020,” he said.
A bullish case
Oil demand is slowing, but so is supply from non-OPEC producers. Growth in US shale output, which was responsible for almost all the gains in 2018 global crude supply, is grinding to a halt.
Prices have also been supported by supply reductions from Iran and Venezuela.
Tamas Varga, who is an analyst with oil broker PVM, said faltering trade tensions will boost oil more than equities because stock markets have held up “reasonably well” in the last few years, compared to oil.
The New York Stock Exchange Composite Index has risen 5 percent from a year ago, while the Nasdaq Composite Index has increased by about 8 percent. Crude has lost about a fourth of its value in the same period.
Unless the tensions around global trade persist well into next year, “it is not far-fetched to conclude” that next year’s oil futures, especially in the second half of 2020, is “undervalued,” Varga said.
While trade wars are expected to be settled next year, “they are dampening physical and financial demand for oil for the time being,” he added.