By Steve Okoekpen | –
Market analysts and stakeholders will all agree that oil producers and consumers endured a turbulent period, as the oil market has had a tough time this year, with prices sliding since October. And yet, there have been a radical turn of events over last week, with the outlook looking drastically different with seismic optimism as the markets opened for trading last week.
It is important to note that one of last week’s biggest market movements was oil, with brent crude surging by more than five per cent at one point, rising back above $60 a barrel, while the West Texas Intermediate, WTI dramatically moved up to $53 a barrel.
There are competing factors responsible for these turn of events in the market. But the question being asked is whether this apparent recovery in oil prices is a catalyst for market and oil price stability. There are however, different opinions and forecast from market analysts. But what is most certain is the unpredictable outcome of events happening around the world that can have a ripple effect on the oil market.
So let’s look at these events shaping the world that can affect this recovery in oil prices and the expected stability oil producers and consumers are anticipating in the market.
The G20 temporary trade truce by US and China
It would be easy to see the last G20 meeting between the two economic powerhouses in Argentina as heralding a thaw in their trade war.
Sadly, it hasn’t. But there are some positives. It looks increasingly likely that the US will not put in place a fresh 0-25 per cent tariff hike in January on $250billion of Chinese exports, as most had thought. It also pushes back the prospect of additional tariffs on $267billion of remaining imports to the US from China.
But that is where I believe the optimism should end. The recent arrest of Meng Wanzhou, the chief financial officer of Chinese telecommunications giant Huawei in Canada at the behest of the US, who wants her extradited to the US to face accusations, she misled multinational banks about Huawei’s control of a company operating in Iran, thereby putting banks at risk of violating US sanctions. Meng’s arrest has roiled markets over fears it would exacerbate tensions between the US and China.
Be that as it may, the tension between the US and China has thawed somewhat now that Donald Trump and Xi Jinping have declared a 90-day trade truce or ceasefire. It might only be temporary, but the deal certainly pumped some positivity into markets, with oil really revelling on the glory.
Of course, the prospect of the two world’s largest economies imposing more trade tariffs had dampened prospects for oil going into next year. As Jameel Ahmad, head of currency strategy at FXTM, points out: ‘’in recent weeks, oil has suffered severely from global economic health concerns stemming from trade tensions’’.
But this latest deal – which sees the two nations promise not to impose extra tariffs for the next three months, at least till 1 March – has calmed concerns, and figures show that the oil market is overjoyed about the ceasefire.
‘’ Further progress towards the easing of trade tensions, coupled with a more downbeat tone from the Federal Reserve regarding interest rate expectations, is presenting an opportunity for traders to take profit from USD buying positions,’’ says Ahmad. ‘’ If there is further progression with this issue, it would be seen as a potential buy for the oil markets.’’
But the timing of the arrest of Meng Wanzhou, is suspicious and if not handled carefully, it may cut short the party for the markets.
Russia and Saudi Arabia Pact
Also at the G20 Summit, Russian President Vladimir Putin announced that Russia would extend its pact with Saudi Arabia to manage oil output next year – a move which paved the way for the OPEC and Russia oil production cut agreement on 7 December.
The oversupply of oil – which has driven down prices – remains a glaring problem. Cuts seem inevitable, but plenty of questions still hang in the air. ‘’We remain concerned that any cuts may well be insufficient to curb over supply in the near term, and that prices will struggle to recover,’’ says Ashley Kelty, oil and gas research analyst at Cantor Fitzgerald Europe.
Qatar walks out on OPEC
While there were reasons to be optimistic, prospects don’t look rosy for the Organisation of Petroleum Exporting Countries (OPEC), after Qatar announced its plan to quit the oil cartel in January next year, choosing to focus on gas production instead.
This decision came as a surprise to the markets, particularly bearing in mind that it was just a matter of days before the OPEC nations meet on 6 December to decide on a policy for production output. And yet, while Qatar, the world’s richest country per person has been an OPEC member for almost 60 years, it’s a tiny oil producer – accounting for less than two per cent of the world’s output.
‘’The news of Qatar pulling out of OPEC in January 2019 will be seen as a negative headline for the cartel, but I am not convinced this will have high impact on the oil market,’’ says Ahmad from FXTM. ‘’Qatar has already stated that this decision is not linked to the political conflict that led to Qatar being blocked by many of its regional peers in June 2017, but because it prefers to focus on the gas industry.
However, some analysts disagree, saying that the decision could suggest conflict inside the organisation. Indeed, it is thought that Qatar’s exit could reflect the growing disaffection among OPEC nations around the Saudi leadership.
‘’We’d suspect that many of the members are wary of how much influence the US has over Saudi Arabia, and whether this leads to decisions that are not necessarily in the best interests of OPEC,’’ says Kelty. He reckons that the Saudis are going to have to work harder to maintain agreement between the group over production cuts.
Another point to bear in mind is that OPEC has lost some influence on the oil industry over the past couple of years, and Ahmad points out that it is increasingly trying to cooperate with outside producers instead.
So overall, it is thought that Qatar leaving the producer group won’t have too much of an impact in the short-term (particularly as its oil production is so small), but whether this signals a deep-seated problem within OPEC is yet to be seen.
OPEC, Russia deal to cut oil production from January 2019
OPEC and its Russia-led allies agreed on Friday 7 December to slash oil production by more than the market had expected despite pressure from US President Donald Trump to reduce the price of crude.
The producer club will curb output from January by 0.8 million barrels per day (bpd) versus October levels, while non-OPEC allies will contribute an additional 0.4 million bpd of cuts, in a move to be reviewed at a meeting in April.
Oil prices jumped about 5 percent to more than $63 a barrel as the combined cut of 1.2 million bpd was larger than the minimum one million bpd that the market had expected.
Start of recovery and stability?
The more than expected production cut gave the market a new lifeline that prompted analysts to start asking, if this could be the start of a correction in oil prices and a regime of recovery and stability? Really, a lot rests on the extent that oil production is reined in, which should become apparent as the days go by. But the overall assessment is that given the huge oil surplus, only a substantial cut will change oil price’s trajectory over the coming months.
However, the optimism was short-lived yesterday when oil returned to bear territory as global markets lost some of the gains made on Friday when OPEC nations and Russia slashed output by 1.2 million barrels per day in Vienna, Austria.
International standard Brent Crude was down more than 1.3 per cent last night to $59.97per barrel.Meanwhile, West Texas Intermediate WTI had fallen around 0.8 per cent to $51.67 per barrel.
Markets ultimately have lost confidence after they bounded five per cent on Friday when some of the world’s largest oil producers cut production more than market expectation to calm the market.
Incidentally, Brent Crude has fallen from around $85 per barrel in early October as increased supply from the US and Russia pressured prices.
The US-China trade tensions coupled with the recent arrest of Huawei’s Meng Wanzhou in Canada on a US warrant and Beijing threatening consequences as well as sour sentiment in global equity markets has hurt the oil market.
The downward spiral is in keeping with the wider bearish trend since October and it seems like dealers have already forgotten about the OPEC and Russian production cut and the anticipated recovery and stability is still elusive as we stagger into the new year amid uncertainty.
