Consensus on oil price is that it remains range-bound
Last week saw a surprise increase in the oil price of 5.2 percent, from its low point on Tuesday to its high of $61.9 per barrel on Thursday. The price opened slightly lower at $61.1 in Monday’s early European trading.
The development surprised because it happened the week after the International Monetary Fund (IMF)/World Bank’s annual meeting, which gave a gloomy economic outlook. The IMF’s global economic growth forecast for this year was downgraded to 3 percent, while the World Bank maintained its at 2.6 percent. This means that the world economy is teetering on the brink of a recession. Both institutions define the start point of a global recession as when average growth slows to 2.5 percent, as this signifies that several of the major Organization for Economic Cooperation and Development economies will have entered into recession. The IMF quoted trade wars, Brexit and geopolitical tensions as the main culprits for the global slowdown. Indeed, it looks like Germany entered a technical recession in the third quarter. The rest of the eurozone performed above expectations, but the slowdown in China cannot be ignored. We can also see the onset of a slowdown in the US economy.
The talk of recession and the localization of supply chains due to trade wars keeps the demand outlook for oil bleak. In its monthly oil market report, the International Energy Agency (IEA) lowered its demand forecasts for 2019 and 2020 by 0.1 percent to 1 million barrels per day (bpd) this year and 1.2 million next year.
While the world crude balance may be in deficit, it is gloomy demand outlook and the impending non-OPEC wall of supply that outweighs any other considerations
Cornelia Meyer
After the Sept. 14 attacks on Abqaiq and Khurais, Saudi Aramco had restored its production by the end of the month. It looks set to do the same for capacity by the end of November. The fallout from the attacks temporarily dampened the outlook. However, the IEA still foresees the increase of 1.8 million bpd of non-OPEC production to hit international oil markets this year, which will go up to 2.2 million next year, meaning there will be a supply overhang if OPEC+ production stays at current levels.
So what was behind last week’s oil price increase? The US Energy Information Agency reported that US crude inventories dropped by 1.7 million barrels, which was in stark contrast to analyst consensus that foresaw an increase of 2.2 million barrels.
While the world crude balance may be in deficit, it is gloomy demand outlook and the impending non-OPEC wall of supply that outweighs any other considerations. The situation was not helped by a statement from Russian Energy Minister Alexander Novak that there have so far been no consultations regarding deepening the 1.2 million bpd cut, which OPEC+ had decided on in June in Vienna in order to balance markets.
There are observers who think that the geopolitical premium is not sufficiently reflected, especially after last month’s attacks on Abqaiq and Khurais. While they may have a point, markets will decide the actual price level and markets traditionally act on data that can be forecasted with some certainty. Geopolitical events are considered outliers and will be priced in as and when they occur.
This means that the price outlook is muted. At last week’s S&P Global Platts conference, nearly 50 percent of attendees surveyed thought that the price level would stay between $55 and $65 per barrel.
Why do these surveys and the general outlook matter now? For one, OPEC+ will meet at the beginning of December and it needs to decide where to take the production cuts going forward. Part of the evaluation will have to consider whether a higher price can offset lower volumes and the sacrifice in market share. For Saudi Arabia, the price of oil takes on particular significance in light of the impending Aramco initial public offering. Investors will take price and volume considerations into account because they will determine the short to medium-term revenue outlook for the company. This being said, Saudi Aramco remains the world’s most profitable company by net income.
• Cornelia Meyer is a business consultant, macroeconomist and energy expert.
Twitter: @MeyerResources
