COMMENTARY. What’s with this dramatic turnaround in crude oil prices

In politics, a week is considered ‘a long time’ and in the commodity markets it is no different. The sentiment in the global crude oil market has decisively turned in the last few days with Brent trading near the three-month low. Last week, Brent was trading close to $80 a barrel on concerns of tight supply.

It is now trading at the low 70s representing a decline of 10 per cent in a week’s time. This follows a surfeit of supply-positive news. An unexpected statement from the US administration officials that some countries may be exempted from the sanctions on Iranian oil was received with relief. If anything, it looks like Russia has almost entirely reversed the production cuts as stipulated in the agreement.

Of course, together with Saudi Arabia, Russia has been demanding an increase in crude production. Now, there are reports of Saudi Arabia selling higher quantities of oil to Asian customers. The continued rise in the US shale oil output too is weighing on prices. According to the US Energy Information Administration, production is set to climb by an additional 144,000 barrels per day in August.

Geo-political worries

Is there no price-supportive news? Yes, of course there is, including strike in Norway as also outages in Libya and Canada. “Oil supplies from Libya are fraught with risks,” commented an expert adding this was despite oil terminals having been opened a week ago. There are protests in south of Iraq where most of the oil fields are located. Political situation in Nigeria too needs a close watch. But the market seems to have ignored the news or taken it in its stride.

While supply fears appear to have been overdone, it is important to examine the demand side. High oil prices have been threatening the demand growth. Concerns that growth in demand will be weaker this year are emerging. Slower economic growth in China – the world’s largest importer – is a definite headwind; so is the expectation of the US slow-down next year.

In sum, with the risk of demand slow-down combined with fairly steady supply increase, the threat of tightening market fundamentals is waning. With this, speculative capital that contributed to an escalation in prices is beginning to move out. The ‘risk premium’ of $10 a barrel is slowly declining.

Smaller surplus

So, crude prices are likely to fall further. Contrary to earlier expectations, the market is likely to be in a small surplus this year and a slightly bigger one in 2019. This is surely weighing on the sentiment at the moment.

Typically, commodity prices move on the basis, not of current demand-supply fundamentals, but expected changes in the future. Any fall in crude price is surely welcome for India as a large importer-consumer. On current reckoning, we can expect year-end price at $65 a barrel or less.

The writer is a policy commentator and commodities market specialist. Views are personal.

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