Risky to be overly bearish on crude oil

G Chandrashekhar | Updated on August 12, 2019 Published on August 12, 2019

There are dangers in being overly pessimistic on crude oil   -  Bloomberg

In recent days, crude oil prices have come under intense downward pressure. This is attributed to renewed concerns over global growth and demand. Escalating trade war between the US and China is also weighing on the energy market.

Brent slumped to $55 a barrel last week, facing significant losses week-on-week. Of course, the market recovered to $57 by Friday last and to $58 on Monday; but the headwinds have not dissipated. WTI is priced at a mere $4 a barrel lower than Brent.

‘Fragile outlook’

The International Energy Agency (IEA) has painted a somewhat negative picture about global oil demand this year and the next. IEA has revised downward its forecast of global oil demand for 2019 and 2020 because of what it calls the ‘fragile outlook’. For 2019, IEA sees demand growth lower at 1.1 million barrels a day and envisages a sizable supply surplus by the beginning of next year if current production levels continued.

Analysts are now betting on crude falling well below $50 a barrel in the weeks ahead because of global growth slowdown impacting consumption demand. After all, energy consumption fuels economic growth. The US shale oil output is also cited as a reason for anticipating a further fall in prices.

But there are dangers in being overly pessimistic on crude oil. We should not get carried away by current events and weak sentiment.

Cut in production

World’s leading producer and OPEC leader Saudi Arabia is determined to arrest the price fall. It has the potential to produce well over 10 million barrels a day to meet demand, but its exports are less than what the market needs to have at present. In fact, Saudi Arabia is said to be seriously considering further cuts in production and is already in talks with other producers to go along. At the same time, exports from Iran have all but collapsed, while Venezuela has moved to the sidelines.

On the other hand, China’s monthly import figures continue to show no marked signs of falling. There is also the likelihood of a stimulus package to boost the Chinese economy, which is facing headwinds following the ongoing tariff war with the US. If the stimulus materialises, it is sure to boost China’s commodity import and consumption. Importantly, observers point out that the new International Maritime Organisation rules setting new standards for marine fuel will boost crude oil demand by close to a million barrels a day from 2020.

Recovery prospects

Given this, sooner or later – and sooner rather than later – oil prices are likely to recover to above $60 a barrel. The WTI too can fare better because drilling activity in the US is reported to have declined to levels not seen since early last year. In other words, oil market is less likely to move on the basis of the IEA forecast.

Once prices begin to move up, speculative capital will move in to exert an exaggerated impact on prices. We have seen this happen all the time. So, from the current levels, an overly bearish expectation on crude oil would be rather risky for stakeholders. In the last quarter of this year, it would be reasonable to expect Brent to trade in the $60-65 a barrel range on current reckoning.

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

Published on August 12, 2019
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