Trade war is not likely to be resolved soon and this might crimp demand for crude oil
Crude oil has turned quite volatile these days. Two significant events have set the tone for bullish momentum in crude oil. However, there is uncertainty prevailing in the global economy, which can puncture this bullish set-up at any time.
As expected, the OPEC has agreed to extend its production cuts by nine months, to March 2020. According to the agreement, OPEC will cut production by 1.2 million barrels per day (b/d). Earlier at the G-20 summit, Russia had said it agreed to extend the production cuts by six to nine months.
US and China also agreed to resume trade talks to resolve differences. The expectation of a trade truce between the two largest economies of the world is positive for crude oil. However, nothing is completely certain regarding whether the US and China can reach a deal. US President Donald Trump's behaviour is quite unpredictable and ambiguous. With US elections in mind, Trump can go to any lengths to get things done in his favour especially regarding trade conflicts and keeping crude-oil prices lower. Hence, the trade war is not likely to be resolved soon and this might crimp demand for crude oil.
The geopolitical conflict between the US and Iran is rising. Iran shot down a US drone over the Strait of Hormuz. In retaliation, Donald Trump imposed sanctions on the Supreme Leader of Iran and eight other military commanders. Iran has breached the limit on its stockpile of low-enriched uranium set under a 2015 nuclear deal with world powers. Iran said it was responding to sanctions reinstated by the US after President Trump abandoned the deal. Trump has lambasted this move of Iran and said that the country was playing with fire. Hence, the tension between the two countries continues to escalate.
Global economic growth may slip to 3.2 percent in 2019, from 3.6 percent the year prior. US growth may contract to 2.6 percent in 2019, from 2.9 percent the previous year. China's 2019 growth may slide to 6.2 percent, from 6.6 percent the preceding year.
OPEC has cut its global crude-oil-demand forecast for 2019 due to the trade disputes. According to OPEC, world oil demand will rise 1.14 million b/d in 2019, 70,000 b/d fewer than previously expected. Also, the IEA has cut its demand-growth forecast for FY19 by 100,000 barrels, to 1.2 million b/d. A slowdown in the petrochemicals industry in Europe, warmer-than-average weather in the northern hemisphere and weak US gasoline and diesel demand could lead to lower demand for crude oil, according to the IEA.
US crude-oil production continues to increase rapidly. It is expected to hit 12.4 million b/d in 2019 and 13.3 million in 2020. The highest increase in production is expected on the Gulf Coast, though slower than a year ago due to pipeline constraints in the Permian Basin.
Of the forecasted 1.37 million b/d growth in 2019, the share of light crude is projected at 1.3 million, to average 7.9 million b/d and, for the Gulf of Mexico 0.15 million b/d, to average 1.89 million b/d, while conventional crude (non-shale) is projected to decline by 0.09 million b/d, to average 2.54 million.
As a result, the EIA has lowered its Brent crude-oil price projections for 2019 and 2020 to $67 a barrel, from the earlier expected $70. Overall, crude oil may be in for a high degree of volatility in coming sessions.
The author is Research Analyst - Currency and Commodity at Anand Rathi Shares and Stock Brokers.Disclaimer: The views and investment tips expressed by investment expert on moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.