While OPEC and its allies successfully reached a deal to extend its production cut quotas into 2020, the oil price response was markedly disappointing, leaving the market to wonder if oil prices will ever recover much beyond the levels that they are today.
Leading up to the most recent OPEC meeting, the Brent barrel was trading at a hair over $66. And while most analysts agreed that the market had already priced in an extension of some sort, not many were calling for prices to fall in a notable way. But prices did just that, falling to just above $62 on Wednesday on a weakened global demand outlook—not even the API reporting on Tuesday a crude oil inventory drop of 5 million barrels was able to stop the dramatic price slide that saw prices off 5%.
One thing that may have the power to lift oil prices out of the low $60s, however, is an end to the US/China trade war, which has helped to dampen oil demand growth prospects.
In fact, one expert is calling the trade talks between the US and China the decisive factor in the oil price outlook this year, according to CNBC, who spoke on Tuesday with oil market expert Amrita Sen.
“I know Al Falih said that the second-half of the year (demand) outlook looks better but so much depends on the trade deal, on the truce between the U.S. and China, and global demand has slowed down considerably,” Sen told CNBC, adding that the truce over the trade talks over the weekend may restore fuel demand. If, however, that demand isn’t restored quickly, weak prices will persist through H2 2019 and even 2020.
According to Sen, if we see even 1 million barrels per day in demand growth, oil prices could “easily be $75 if not slightly higher.”
Saudi Arabia, for one, is reportedly banking on oil above $75. In fact, some say it is banking on $80 oil—the minimum amount that the Saudi’s budget needs to breakeven, according to some. This perceived do-or-die moment for Saudi Arabia has led many to believe that this was behind the successful agreement reached by the cartel. But this successful agreement fell short of lifting prices in the immediate term. Saudi Arabia is now expected to lower prices of most crude oil grades that it sells to its largest market—Asia—trade sources said on Tuesday, with its OSP for Arab Light to Asia expected to be $0.30 to $0.50 lower, according to Hellenic Shipping News. The OSPs would need to be lowered, the trade sources said, because spot prices could drop in August.
This oil demand growth is an elusive figure. The EIA in its June Short Term Energy Outlook pegs oil demand growth at 1.4 million bpd in 2020—an increase over the expected 1.2 million bpd for 2019. The IEA also pegged it at 1.4 million bpd for 2020 and 1.2 million bpd for 2019—a downward revision from its previous estimates. OPEC, too, cut its projections, completing the soured outlook trifecta, to 1.14 million bpd in 2019—a 70,000 bpd downward revision. The reason for the lowered demand growth projections, OPEC said, was the trade disputes.
As insufficient as they may be, today’s low oil prices do have one positive for Saudi Arabia and its band of merry producers, and that’s the fact that these lower prices also clip the wings of US shale growth—and some may argue that Saudi Arabia is wisely gauging this aspect of the fickle oil market that swings not just on oil inventory and demand, but on trading activity and market sentiment.
If oil prices are to rise to $75 bpd, demand growth projections will need to be revised unless there is a serious production outage by one of the world’s major players.