The key drivers influencing oil markets are certainly transitioning from supply-side to demand-side concerns.
Persistent fears over a global downturn eroding demand for oil have sent Brent tumbling roughly 13.5 percent and WTI shedding roughly 7.5 percent over the last three months.
Although some anxiety about excess supplies flooding the market is being soothed by OPEC+’s mission to cut output by 1.2 million barrels per day (bpd), US shale production remains as robust as ever topping 12 million bpd. A significant correction in crude oil prices is certainly on the cards, especially when factoring how world demand for oil is growing at the slowest rate, since the world financial crisis, just under 600,000 bpd, according to the International Energy Agency (IEA).
Demand-side concerns in the form of rising US inventories, persistent US-China trade disputes and worrying signs of decelerating world growth have not been kind to oil prices. The International Monetary Fund (IMF) has downgraded its global growth forecasts four times in nine months with world growth projected to hit 3.2 percent in 2019. Sentiment continues to be gripped by the numerous twists and turns throughout the US-China trade war, which have left most investors questioning what will happen next in the trade saga.
OPEC has already delivered a downbeat oil market outlook by cutting its forecast for global oil demand growth in 2019 by 40,000 bpd to 1.10 million bpd. When factoring how global recession fears are denting appetite for riskier assets, WTI and Brent are positioned to remain pressured for the rest of 2019.
Another factor poised to impact oil’s valuation will be the Dollar’s performance. The Greenback remains king of the currency markets despite the fact that the Federal Reserve is widely expected to cut interest rates in September. Appetite towards the Dollar is set to remain robust as unfavourable global conditions send investors rushing to safe-haven assets. An appreciating Dollar will only compound to Oil’s woes and accelerate the downside pressures triggered by demand-side factors.
While oil markets could still find some support in the near to medium term from geopolitical tensions in the Middle East and possible supply-side shocks, the road ahead is filled with many obstacles and potholes. For as long as trade uncertainty and recession fears omit demand from the equation, any meaningful upside on oil will be limited.
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© Opinion 2019