Various factors drive crude oil prices, which have seen significant volatility over the past year. Geopolitical risk premium is certainly high on the list of reasons responsible for the falling oil prices. From rising trade disputes to crushingly low demand, from tensions in the Middle East region to a weakening global economy, various factors have culminated in an extremely bearish price outlook for crude oil, the world’s primary energy source.
October 2019 has been bad for crude oil prices, with a further decline of 1% as of October 21, 2019, on account of expected weakness in demand. Brent Crude oil futures declined 0.8% to trade at $58.96 a barrel, while the US West Texas Intermediate (WTI) crude futures fell 0.9% to settle at $53.31 a barrel on the same day. Experts suggest that oil prices may come under severe selling pressure in the coming weeks, if the US-China negotiations get derailed.
The market is currently stuck between opposing sentiments, geopolitical concerns and economic worries. All this and more are contributing to this price volatility and downturn.
US sanctions on Iran’s energy sector in April 2019 led to the latter threatening to close the Strait of Hormuz in retaliation. This act could be catastrophic for the global oil markets, given that 20% of global oil production and one-third of seaborne oil from the region’s top oil producers, including Saudi Arabia, Kuwait and Iraq, passes through this channel into the markets in the Far East.
Although an unlikely event, since 85% of Iran’s imports come through the strait, the announcements immediately led to a rise in oil prices, only to bounce back lower later. To counter the drop in Iranian oil supplies, OPEC countries like Saudi Arabia and others, assured that they would increase production to balance the market. The event also escalated tensions of a naval stand-off between the US and Iranian forces, causing market volatility.
An escalating series of attacks rattled the global markets in May-June 2019. First, four tanker attacks took place in the Gulf of Oman, near the UAE port of Fujairah, in May 2019. The second round of attacks occurred on two ships, one Japanese and the other Norwegian, in the Gulf of Oman, apparently launched by Iran. Although these attacks were expected to send crude oil prices skyrocketing, the prices mostly stayed stable, before falling again in the next few days.
In fact, the prices dropped more than $10 during the course of these attacks. Economic pressures have been cited as the reasons for this downward pressure on oil prices; particularly slower growth of the Chinese economy and rising US-China trade tensions.
On September 14, 2019, a drone attack on the Saudi Arabian Aramco oil facilities wiped out about 5.7 million barrels at the production level, per day. News of the disruption in oil supply from the world’s second largest oil producing country sent crude oil prices soaring, but only for the short term.
On September 20, 2019, the country announced that production had been restored to the pre-attack levels, which caused oil futures to trade at a one-month low. WTI fell 3.3% to trade at $54.07 a barrel, while Brent Crude declined 1.8% to trade at $60.78 a barrel.
Throughout 2019, the International Energy Agency (IEA) has been revising its demand growth projection for the year downward. In January, the estimate stood at 1.4 million bpd, which fell to 1.1 million bpd by October 2019. Even the 2020 demand growth appears subdued, at 1.4 million bpd in June 2019, lowered further to 1.3 million bpd in September 2019.
The EIA also forecasts a 29.8 million bpd demand growth for the entire year, 2019, which is down 2.1 million bpd from 2018. The EIA predicts that global growth in supply, amidst weaker demand, will result in an inventory build-up, which will push prices further down. The crude oil forecast for Q4 2019 is down by $1 per barrel (bbl) to $59/bbl.
The cause of low demand could be an overall global slump in economic growth, but the trade dispute between the US and China seems responsible for about 70% of the price decline, according to Bloomberg. China, which is the largest oil importer globally, has been experiencing weaker economic growth, slowing to 6%, on a year-on-year basis, in Q3 2019, due to the trade war. This is the economy’s weakest growth in almost three decades and a significant factor behind declining oil prices.
The strength of the US Dollar is a vital contributor to the falling oil prices. In the last week of October 2019, a string of US economic releases will be published, amidst high expectations of an interest rate cut. If the data shows that the US Federal Reserve is not in a hurry to slash rates further, the US Dollar could strengthen, leading to falling crude oil prices. US equities usually move along with the price of the Brent futures, which typically declines when the central bank doesn’t meet market expectations of a dovish monetary policy.
The US Energy Information Administration (EIA) has released predictions that a majority of US households will spend less on home heating fuels in the 2019-20 winter season, a drop of an average 4.4% from the 2018 levels. Warmer weather has been listed as the main reason for this decreasing demand. Household winter heating oil is derived from crude oil, and lower demand is a downside risk to price levels.
OPEC supply cuts, since the beginning of 2019, haven’t been able to boost crude oil prices. Despite its efforts to ward off a supply glut, market prices suffer from waning global demand. Increased awareness of the climate crisis has also led to many people opting for cleaner energy sources. The IEA predicts that the world’s total renewable power capacity will grow 50% from 2019 to 2024, while solar PV installations in households will grow by around 100 million in the same period.
Oil prices are steadily going down and experts predict price crashes like those seen in 2008-09. Times like these prompt traders to keep a close eye on important forecast releases and news reports of geo-political developments, especially related to major oil producing and consuming nations.