Oil prices over the past few weeks have been heavily influenced by conflicts on the US-China trade front and rapid shifts in global risk sentiment.
WTI Crude has gained roughly 7.75% since the start of Q4 on the back of trade optimism, with Brent crude lagging behind appreciating around 3.5% during the same period. Although this commodity has appreciated almost 30% year-to-date with bulls in the driving seat, it remains uncertain whether this momentum will rollover in 2020. Given how trade tensions between the world’s two largest energy consumers have fueled fears of slowing global growth and declining demand for crude, the long-term outlook is bearish.
Another meeting of the Organization of Petroleum Exporting Countries (OPEC) will take place on 5 and 6 December which could influence Oil’s valuation for the rest of 2019. Markets expect OPEC+ to extend their current round of production cuts beyond March, deep into 2020. Oil prices will most likely offer a muted reaction to this outcome. While there is speculation around deeper production cuts of at least 400,000 barrels a day, this still has to be approved by Russia who has often taken a tough stance for deeper cuts. Even if OPEC dish out a bullish surprise with deeper cuts, the positive gains are bound to be capped down the road.
It must be kept in mind that US Shale production reached a record 12.46 million barrels per day in September earlier this year. Deeper cuts from OPEC have the potential to prop prices higher in the short to medium term which could result in more US shale production. In context, the world’s oil output is nearly 80 million barrels per day with over 30% from OPEC. With US Shale pumping roughly around 12.5 million barrels, this makes up around 15.6%. Essentially US shale is OPEC’s primary competitor and deeper production cuts from the cartel may end up handing over more market share to Shale.
Latest reports of Saudi Arabia threatening to boost oil production unilaterally - if some OPEC nations continue to defy the group's output curbs - may raise concerns over the future the output cut deal. Oil prices will be exposed to downside shocks should Saudi Arabia boost oil production, as this may discourage other nations to respect the group’s output cuts. Surging output from Saudi Arabia, rising production from US shale and renewed trade tensions may ensure oil weakness remains a recurrent theme in 2020.
As the year slowly comes to an end, the short- outlook for Oil will not only depend on the outcome of the OPEC meeting but whether the United States moves ahead with tariff hikes on 15 December. Given how the tariff hike on Chinese goods will most likely intensify trade tensions and global growth fears, bears could still make an appearance before the end of 2019.
* Any opinions expressed in this article are the author’s own
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