COMMODITIES 8 minutes to read

Crude oil struggling to halt the slide

Ole Hansen

Head of Commodity Strategy

Summary:  Next weekend's G20 meeting in Buenos Aires will be a virtual sideshow to the main events – the crunch meeting of presidents Trump and Xi and also that between Putin and the Saudi crown prince. These smaller meetings may determine the state of the oil market for months to come.


The WTI and Brent crude oil futures contracts are currently trying to stabilise ahead of key event risks this coming weekend. Two gatherings between China and the US as well as between Russia and Saudi Arabia within the G20 meeting in Buenos Aires is likely to set the tone in the oil market for the remainder of the year. Taking the stairs up and the elevator down best describes the price behaviour in crude oil these past couple of years.

Eight weeks of constant selling has seen WTI crude oil return to $50/b and in the process surrendering half of the gains that were achieved since the February 2016 low some 33 months ago. The reason behind the selling is well known so more importantly is what happens next.
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Source: Saxo Bank
Currently we see the following scenarios supporting a recovery in crude oil:

Saudi Arabia, with support from Russia and its GCC friends, agrees to cut production by somewhere between 1 and 1.5mbd. This would further be supported should the US and China find some common ground on trade when they meet on Saturday at the G20 summit in Buenos Aires.

Global refinery activity is about to step up a gear following maintenance. On a global level this could increase oil demand by somewhere between 1.5 and 2mbd. In the US a pick up in refinery demand has already been seen but record production has so far prevented crude stocks from falling. 
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Speculators have cut bullish bets to a level from where demand has re-emerged on two previous occasions during the past two years:
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The recent price slump, especially measured in several key EM currencies, has removed some of the risk to global demand growth, much of which stems from these, especially China and India.
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The near one-third slump in the price is likely to stimulate demand while producers, especially of US shale oil, may struggle to meet previous growth expectations. On that basis we can expect some adjustments from three major oil forecasters EIA, IEA and Opec in terms of their projections for 2019 demand growth (higher) and non-Opec supply (lower).
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The slump in crude oil will help reduce inflationary pressures thereby reducing the pressure on the Federal Open Market Committee to continue its gradual rate hike cycle. Such a move would further support our belief that the US dollar may begin to weaken as we move into 2019.
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With so many potential sources of support the question remains why have we not seen a bounce already. Saudi Arabia and especially its crown prince have come under international and domestic pressure since the murder of Jamal Khashoggi in Istanbul on October 2, the day before Brent crude oil peaked at $86.7/b.

These developments have left the Kingdom weak in the eyes of the wold and  dependent on support from President Trump. A dependency which has come at a price, namely the promise to pump. Just like the rest of the oil market, Saudi Arabia was blindsided by the US decision to allow eight countries to continue buy oil from Iran after the reintroduction of sanctions in early November. This decision, combined with the increase in production, left the market with nowhere to go but down and fast. 

The renewed weakness today came after Russian president Putin, while praising the Saudi Crown Prince for the success of the Opec+ agreement, also said that Russia was “absolutely fine” with oil prices around $60/b. Russia has due to its three-year average rule based its 2019 budget on an oil price around $43/b while Saudi Arabia is in need of a price closer to $90/b to meet its budgetary requirements. This weekend Putin will hold talks with the crown prince in Buenos Aires and the market will be looking for signs that they will do a repeat of the G20 meeting in September 2016 which laid the foundation for the Opec+ agreement to cut production. 

First up, however, we have the Weekly Petroleum Status Report from the US Energy Information Administration (EIA) at the usual time of 15:30 GMT. A tenth consecutive and counter-seasonal rise in crude oil stocks was reported by the American Petroleum Institute last night. But instead of weakening further the market took some comfort from a 2.6 million barrel drop in gasoline stocks before trading lower in response to the above mentioned comments from Putin about oil at $60/b.

The result and immediate reaction to the EIA report will be posted on my twitter feed @ole_s_hansen.   
 
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Source: US Energy Information Administration

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