Signals from “black gold” prices

Friday, 2019-06-14 16:10:59
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Oil facilities are seen on Lake Maracaibo in Cabimas, Venezuela on January 29, 2019. (Photo: Reuters)
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NDO - The world oil prices rose after two oil tankers were attacked in the Gulf of Oman yesterday. However, world oil prices have witnessed periodic dropping in recent days. The fall in the price of “black gold” is a signal that the health of the global economy is in danger of falling, leading to the prospect of a significant drop in oil demand.

In its recent stint, the price of “black gold” on the world market has decreased sharply. On June 12, oil prices fell to the lowest level in nearly five months. On the New York market, WTI light sweet crude oil for July delivery fell 4% to US$51.14 per barrel; and Brent crude oil prices in London for August delivery also fell 3.7%, to US$59.97 per barrel.

According to analysts, with US crude oil reserves rising, key exporting countries have yet to agree on an extension of the agreement to cut oil production and so oil demand is expected to decline. It was the main reason for the decline of the “black gold” prices in recent spells.

On June 12, the same day the price of oil dropped sharply, the US Energy Information Administration (EIA) reported that US commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) during the week ended June 7, increased by 2.2 million barrels from the previous week. According to statistics, at 485.5 million barrels, commercial stocks were at their highest since July 2017 and about 8% above the five-year average for this time of year.

The above figures lead to concerns that an increase in oil supply puts pressure on oil prices. In addition, the US shale oil output increased sharply in 2018 and is expected to continue to rise this year, which is also causing oil prices to fall.

According to the EIA report, oil output from seven major shale formations in the US exceeded eight million barrels a day by the end of 2018. The US crude oil output rose to more than two million barrels a day in 2018 to a record of 12 million barrels per day. Accordingly, the US surpassed Russia and Saudi Arabia to become the world's largest oil producer.

Another important factor putting pressure on the recent drop in oil prices is that the key oil producers and exporters in the world have not yet agreed on a plan to cut production to push up oil prices. Members of the Organisation of the Petroleum Exporting Countries (OPEC) together with other producers such as Russia have agreed to cut output by 1.2 million barrels a day since the beginning of this year to push oil prices up.

Recently, the multinational investment bank Goldman Sachs stated that in the context of uncertain macroeconomic prospects and that the oil production of Iran and other countries are not stable, OPEC can extend the agreement on further production cuts. According to Minister of Energy and Industry of the UAE S. Mazrouei, OPEC member countries are moving toward a consensus to continue cutting production.

However, Saudi Arabia’s Energy Minister Khalid Al-Falih revealed that of all the signatories to the OPEC+ agreement forged to rebalance the oil market through production cuts, Russia is the lone holdout. Therefore, the market is waiting to see at the meeting scheduled to take place at the end of June whether OPEC and its partners will decide to extend the agreement to cut oil production or not.

The third cause of the oil prices decrease is the prospect of the decline in oil demand. EIA has just lowered its forecast of global oil demand growth. In a monthly report, the EIA lowered its 2019 world oil demand growth forecast by 160,000 barrels per day to 1.22 million barrels per day. The US and China are the two largest oil consumers in the world.

According to some experts, the trade war between the two largest economies in the world has not yet cooled down, the economic growth of the US and China is going to be more difficult, leading to a decline in the demand for oil consumption. According to Chinese Customs, the country's crude oil imports slipped to around 40.23 million tonnes in May, from an all-time high of 43.73 million tonnes in April.

The decline in oil prices due to the third reason mentioned above is causing troubling signals with the growth prospects of the global economy. Barclays bank, in a note, said its economists had revised down their GDP growth outlook for the United States, China, India and Brazil - countries that account for more than three-quarters of their oil demand growth assumptions for this year. The International Monetary Fund (IMF) has warned that the current US-China trade war could slash global economic output by 0.5% in 2020.

In this context, analysts increased pessimistic assessments about the prospect of world oil prices. Russian Energy Minister Alexander Novak said he could not rule out a scenario in which oil prices could fall to US$30 per barrel if the global oil deal was not extended. The head of the Russian energy industry said that OPEC and other oil exporters needed to find suitable solutions when preparing to meet in Vienna (Austria) in the next few days.

According to analysts, the reduction in output only solved part of the world “oil price problem”. Therefore, in order to prevent oil prices from falling sharply and maintaining stability in the long term, it is necessary for governments to join hands to "cool down" the trade war, fight trade protectionism and implement reasonable solutions to stimulate the economic growth and push up oil demand.