In the last four weeks, crude oil market collapsed by 12-15 per cent; and last week, Brent briefly traded below the psychological $60 a barrel, a five-month low. This is notwithstanding the current supply tightness following US sanctions on Iran oil and involuntary outage in Venezuela. In the US, oil output has reached a record high which is weighing on the price of WTI trading close to $50 a barrel.

Why did oil fall steeply? There are concerns on two counts. While economic data coming in from major economies are weak, the trade conflict between the world’s two largest economies, the US and China, continues to escalate. This is making demand outlook rather gloomy.

Speculative investors holding long positions on the exchanges have been steadily exiting the market as evidenced by fall in net long positions. In the current scenario, punters see no significant opportunity for an upside price movement anytime soon.

Members of the oil cartel OPEC under the leadership of Saudi Arabia are, of course, not at all happy with the current price situation. Many of them actually need higher prices to fund their public spending. OPEC+ output cut decision has now run its six-month course and will come to an end this month.

OPEC members are likely to do everything under their control to prop the market up. So, the big question is whether the output cut agreement will be extended beyond June till the end of the year. In the next meeting scheduled for early July, there is likely to be talk of a deeper output cut; but it is an extremely unlikely chance that such a decision will be unanimous. As of now, there are no clear answers. Russia could be a dark horse. The country is already losing market share because of suspension of supplies through one of its pipelines because of contamination. They are not at all happy with losing market share, especially as the US output is ramped up.

So, there is risk Russia may pull out of the OPEC+ production cut deal. The country is said to be comfortable with crude (Brent) at say $65 a barrel. In the event, it may not agree to an extension of the agreement, much less a deeper cut.

More significant than the current market fundamentals is the demand outlook for the second half of the year. There is already enough pessimism about growth. Europe and Japan continue to show tepid growth. China is slowing decisively although recent trade data in terms of oil import seems resilient. The US is widely expected to slow down in the second half of this year as the positive effects of stimulus fade. In other words, the global picture is far from rosy.

According to the World Bank, global growth will weaken to 2.6 per cent in 2019 as risks remain, before inching up to 2.7 per cent in 2020. Growth in emerging market and developing economies is expected to stabilise next year as some countries move past periods of financial strain, but economic momentum remains weak, the Bank said.

The positive correlation between economic growth and energy consumption is, of course, well recognised. In commodity markets it is axiomatic that the market will move, not on the basis of current fundamentals, but on the basis of expected changes in fundamentals in the future. From that perspective, market participants foresee limited demand growth for energy products.

Brent crude could possibly trade in the $60-$65 a barrel range in the last quarter of the year. While the price level may be seen as a small relief for India, global headwinds are going to pose huge challenge for the country’s growth.

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

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