Oil prices hit 8-month low amid supply, demand concerns

Oil prices are currently hovering around the $65-mark, after tumbling close to 7 percent on Tuesday, amid concerns of rising supply and weakening demand.

On Wednesday, at 10:30 AM Riyadh time, Brent Crude was down 0.40 percent to $65.21 a barrel (bbl). The global benchmark fell 6.6 percent in yesterday’s session, settling at $65.47/bbl.

Meanwhile, WTI futures were trading 0.54 percent lower at $55.39 a barrel.

“A bearish monthly report released by OPEC yesterday appears to have spurred an even more rapid acceleration in oil’s decline to that seen earlier in the week,” Dubai-based Emirates NBD said in a research note.

In its report, the oil-producing bloc predicted that global oil demand would increase by 1.29 million barrels per day (bpd) in 2019, a significant downward revision of 70,000 bpd from the previous outlook, and the fourth consecutive forecast cut. Output, however, rose by 127,000 bpd to 32.9 million bpd, OPEC said.

“If the bloc were to continue producing oil at current levels, that would leave a considerable supply glut. This paves the way for the next OPEC meeting to result in a concerted policy change and an OPEC-wide measure to curb supply once more,” Emirates NBD said.

In recent weeks the crude has shown a decidedly weak bias and prices have dipped by more than 18 percent since peaking at near four-year highs in early October.

This sharp sell-off is the result of a number of factors – receding fears of a supply shortage due to the US waivers granted to some countries for Iranian crude imports; record US oil production; soaring inventories; and a weaker global economic and oil demand outlook stemming from ongoing global trade tensions.

Apart from the OPEC’s report, another immediate trigger for the fall was a tweet by the US President that said Saudi Arabia and the OPEC should not hopefully be reducing oil output.

On Monday, Trump tweeted, “Hopefully, Saudi Arabia and OPEC will not be cutting oil production. Oil prices should be much lower based on supply!”

Trump’s tweet followed after Saudi Energy Minister Khalid Al-Falih said earlier this week that a global oil output cut of one bpd is needed to maintain market balance and the Kingdom will reduce production by 500,000 bpd in December.

Oil prices also reacted to the U.S. Energy Information Administration’s latest data that showed that domestic crude inventories rose 5.8 million barrels in the latest week. This was more than double what analysts had expected.

Where to from here

However, aside from the latest wild price drop, there is still plenty to look out for that could see prices heading to the upside over the coming months, analysts say. Almost all the factors causing the oil prices to dip have already been priced into the oil price curve.

“The fundamental shift in oil markets from previous apprehensions concerning a supply crunch to now a real concern surrounding oversupply appears overdone,” said Ehsan Khoman, Head of MENA Research and Strategy, MUFG.

In the latest report he notes, “Oil markets are significantly oversold in our view, and we remain convinced that both Brent and WTI will rebound from their current bearish market mode – both crude benchmarks have declined by more than 20 percent since their four year highs witnessed at the end of September. Technical fundamental indicators signal a rebound is on the horizon.”

“We view that ongoing production cut rhetoric by members states ahead of this date (Dec 6 when OPEC+ member states meets in Vienna) will give further upward bias to the front end of the oil price curve in the coming weeks,” the report noted.

Jameel Ahmad, Global Head of Currency Strategy & Market Research at FXTM, says the price of oil would benefit from less supply heading into 2019.

“We do feel that the oil markets will be at risk to volatility as financial markets become more aware over the potentiality of a slowdown in the global economy next year, and that a reduction in oil supply next year would be appropriate with the risks of lower economic growth,” he said.

Technically speaking…

Konstantinos Anthis, Head of Research at ADS Securities, says technically, the $55 level is a major support and its break in October last year kicked off the major rally that drove prices to $76 a year later.

As such, it will be crucial to see how oil will react to this test before we decide on its outlook going forward, he added.

“In the near term, the oil market has only a small buffer to absorb any additional shocks such as slumping Venezuelan output, which keeps the uncertainty high,” Diego Wuergler, Head Advisory Solutions Middle East, Julius Baer, told Argaam.

“Our price targets for crude oil (WTI) are $72.5 (3 months) and $65 (12 months),” he added.

Write to Sunil Kumar Singh at sunil.kumar@argaamplus.com