Brent likely to trade around $60 a barrel till year-end

G Chandrashekhar | Updated on November 05, 2019

The global crude oil market is torn between hopes of progress in the US-China trade talks, on the one hand, and concerns over global growth and oil market outlook, on the other.

While a fall in global PMI has underscored the latter, a breakthrough in the tariff war has the potential to improve the sentiment. Reports of a truce in the trade war, and optimism that the dispute cannot worsen any more, is beginning to boost oil prices. On Monday, Brent climbed to $62.8 a barrel, rising by close to $3 since last week on reports of progress.

However, it is too early to bet if the price recovery will last, given the market fundamentals of supply and demand. Output is rising. The US Fed rate cut and positive Chinese manufacturing data have been somewhat supportive. In other words, the oil market narrative is currently dominated by economic uncertainty.

At the same time, supply concerns are not fading either. For instance, the number of drilling rigs in the US has continued to fall (below 700 by end-October), which in turn weighs on output and supplies. Simultaneously, OPEC officials are talking about deeper cuts in production in 2020. A meeting is scheduled for December.

OPEC production

Reports suggest the OPEC October production was 29.6 million barrels a day following the normalisation of the Saudi output post-attack. This production number represents an excess of 1.4 million barrels if one goes by the International Energy Agency’s forecast for early 2020.

OPEC leader Saudi Arabia has a huge stake in the Aramco IPO and is expected to do everything it can to ensure prices stay attractive for producers. No wonder Brent continues to trade in the vicinity of $60 a barrel with the occasional spurt of a dollar or two depending on flow of news about rapprochement between the two warring countries, USA and China.

The current prices — Brent above $60 a barrel — are driven by the inflow of speculative capital. By end-October, net long positions had increased markedly as compared with positions at the beginning of the month. Given that the upward movement is largely speculation driven, there are doubts about the sustainability of the current prices. Any negative news will lead to quick liquidation of the less-committed longs.

Given the tug-of-war between bullish and bearish factors — and none of them seems to be winning, on current reckoning — for all intents and purposes, Brent is most likely to continue to trade in the vicinity of $60 a barrel (give or take $2) till the end of the year.

What will happen in the early part of 2020 will, of course, depend on developments in the coming weeks and months.

Further easing of the monetary policy and IMO regulations in 2020 will result in higher consumption demand. Any decision by OPEC+ to curtail output further will propel the market higher.

As a large importer, India needs to exercise caution and not get carried away by bearish forecasts. It is necessary to closely monitor the market and strike import deals when prices turn attractive.

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

Published on November 05, 2019

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