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Volatile Prices Ahead?

Crude prices have suffered their steepest and fastest fall in a decade. The Brent crude price has fallen to just $58.68 per barrel from $86.70 at beginning of October, a decline of a third. The price of crude is determined primarily by actual and prospective supply-and-demand factors and secondarily by the sentiment of bears (fear) or optimism (bulls), whichever is in the ascendant at any one time.

Record production by Saudi Arabia of 10.5 million barrels a day (MMbpd), by Russia of 11.4 MMbpd and an unexpected surge in U.S. tight oil production to 11.5 MMbpd, combined with rising inventory in OECD countries have fed fears of a supply glut and bearish sentiment.

Current volatile stock markets, a shaky global economy and economic uncertainty, are now heavily weighing on crude prices. Both the IMF and OPEC have revised downwards forecasts of demand for oil in 2019, in response to lower expected economic growth in East Asia, the Eurozone, Latin America, the Middle East and China. However, fears of an escalation of a trade war between the United States and China were alleviated at the G20 summit last weekend. The rise in tariffs due Jan. 1 have been postponed for 90 days and China has agreed to increase imports of U.S. goods including energy. Therefore, current forecasts of oil demand averaging a record 100 million barrels a day during 2019 may be conservative.  

A free market in oil can guarantee volatile oil prices and uncertainty for both producers and consuming countries. A managed market by OPEC and Russia, who now control around 45 percent of the world’s supply of crude, offers greater stability. However, in reality, the price of crude is now controlled by the three major producers: Saudi Arabia, the United States and Russia – who together produce more oil than the 15 members of OPEC. Read more

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