Home Commodities Crude-Oil Price Pulls Back from More Than Seven-Month Low in August

Crude-Oil Price Pulls Back from More Than Seven-Month Low in August

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By: Miles Pearson – Forex Focus

Oil prices expected to edge higher in the near-term, but the long-term outlook remains bleak. 

Crude-oil prices extended gains midway through August, with analysts viewing this as a positive sign that prices could firm in the near future. The optimistic outlook comes against the backdrop of an expected surge in demand for gasoline amid the driving season in the United States, which is likely to cap further weakness in the near-term—although, in the long run, the price of oil and the future of the industry remain decidedly bleak.

On August 12, the price of Brent crude futures for September delivery rose to $58.63 (+0.2 percent), while the WTI (West Texas Intermediate) traded at $54.81, an increase of almost 0.6 percent. The S&P 500 Index, on the other hand, fell by 0.8 percent amid a 1.5-percent slide in ExxonMobil (NYSE: XOM).

Historically, August has been a good month for the oil industry, with rising demand during mid-summer neutralising excess supply. This year, however, demand has remained weak, while supply has not dropped enough to compensate for the lacklustre demand. This in spite of the ongoing sanctions against Iran, which have led to a supply decrease of almost two million barrels per day from the market.

According to Neil Beveridge, analyst at AllianceBernstein, international oil inventories in OECD (Organisation for Economic Co-operation and Development) countries rose by roughly 100 million barrels from January to July of this year, triggering an oversupply of around half-a-million barrels per day. While Iran has been keeping its unsold oil in tankers even as it tries to deal with sanctions imposed by the United States, major oil-consuming countries such as China were also seen increasing their oil inventories.

On the demand front, the US-China trade conflict has led to a slump in global oil demand. In the first week of August, the IEA (International Energy Agency) slashed its projections for international oil demand to 1.1 million barrels per day in 2019 and 1.3 million in 2020, a drop of 100,000 and 50,000 barrels per day respectively, following “very sluggish” growth in the first six months of this year.

However, Beveridge believes that oil prices may not follow a linear downhill path in the short-term and expects prices to stabilise over the next few trading sessions. According to him, “With OPEC exports continuing to decline and peak driving season in full swing, we expect sizeable inventory draws in August which should be price supportive in the near term.”

Likewise, RBC Capital Markets analyst Michael Tran also does not see an issue with short interest in the near-term. He does not anticipate a large number of market players to short oil right now because of the risk posed by a sudden surge in prices in the event of a demand disruption due to the geopolitical tensions in the Middle East.

On the flip side, the longer-term prospects for the oil market remain bleak, with supply most likely to outstrip demand in 2020. OPEC (Organization of the Petroleum Exporting Countries) members, which have already slashed production in an attempt to prop up prices, might be forced to cut production even more next year. Based on current stats, supply is projected to increase by 2.2 million barrels per day, while demand is expected to grow by only 1.2 million barrels per day. And even that might be too optimistic if the global economy weakens further.

Why are oil prices consolidating of late?

In the first week of August, oil prices were basically in a free fall, so what caused the turnaround? Brent crude had already dropped to the mid-$50s per barrel and WTI was on the verge of falling below $50 when Bloomberg reported that Saudi Arabia was considering stronger measures to boost oil prices. Citing a Saudi official, the US media giant said the country “won’t tolerate the continued slide in prices and was considering all options”, although the official refused to detail what the Saudis planned to do; it’s probably safe to say that a mere rumour won’t be able to sustain an increase in oil prices over the long-run.

Meanwhile, US shale production continues to expand, although the latest quarterly earnings from shale drillers reveal massive turmoil, with wary investors cutting back amid operational challenges. While this would normally be good for oil prices, so far, the impact has not been significant. The reason for this is that right now, demand is the most important concern and makes the situation much more complex for OPEC than if, for example, demand far exceeded supply.

Historically, other recessions in oil prices were observed when US shale producers were pumping huge volumes of oil into the market. While demand at that time was still mounting, the pace of supply was growing even more rapidly. This time, however, the situation is much more complicated. US shale output is not growing rapidly, and over the last nine months, OPEC production, too, has dropped to 15-year lows. 

Analysts at Standard Chartered recently wrote that they expect an international stock-draw during the second half of 2019. They added, ”The market is being driven by fears of a more extreme outcome: a sharp compression in global trade and GDP, accompanied by falls in global oil demand.” The analysts believe that there are few if any good options for OPEC nations right now. While OPEC+ allies are in a position from which they cannot control the market since the core of the problem rests with policymakers in Washington and Beijing, the UK-based bank has advised these oil-producing countries to “stay on the sidelines, for now”.

Whether OPEC will heed that advice remains to be seen, especially since the Saudis do not regard the warning as a viable alternative. What happens from here largely depends on whether the latest recovery in oil prices proves to be sustainable or not. In the short-term, though, OPEC is not expected to take any drastic measures; but according to Rapidan Energy Group, next month’s JMMC (Joint Ministerial Monitoring Committee) summit might be “supersized into an emergency ministerial meet to consider faster/deeper cuts” if oil prices weaken further. The firm added that OPEC might have to reduce production by an additional one million barrels per day during the spring of 2020 when the present deal expires. If prices see a rapid decline by then, the production cuts could take place even sooner, which could be a risky gamble for oil producers.

In a recent conference call with investors, Saudi oil giant Aramco announced a 12-percent drop in income in the first half of 2019, largely on the back of falling oil prices. While the Kingdom considers a lower oil price to be the bigger adversity when compared to a production cutback, the world’s top oil producer may find it difficult to continue convincing the other oil producers; and even if they do, the Saudis could be compelled to accept a sizable cut in domestic production. For the moment, rumours from oil-rich Saudi Arabia seem to support oil prices, but this is not a game that can be played indefinitely, especially if the global economy continues to deteriorate.


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