These are uncertain times for global commodity markets. And the first casualty of uncertainty before any commodity is oil. The US-China trade war could go anywhere, and that has kept the oil prices at bay for some time now. Some even say the market has by and large factored in the premium on a potential escalation of tensions between the two economic giants.
But the tale of uncertainties goes beyond just that. The major oil producers themselves are not too sure of where the global economic outlook is going to settle at – which has given rise to varying demand outlooks for 2020. Most of them are not rosy, as even the historically optimistic research houses known for bullish bias, have cautioned a considerable slowdown in global oil demand is in the offing.
In a rare move, the strongest oil cartel OPEC in its monthly release, presented a “somewhat bearish” outlook” for oil. Now this is something that will definitely need to be priced in as OPEC ha historically refrained from giving directions on prices, having restrained itself to broader supply dynamics from partner countries.
The street view is fast changing as oil pundits believe OPEC will have no option but to extend the ongoing production freeze deal. Not only that, but the oversupply in the market means that the supply cut quota will also have to be revised upwards ,with estimates going up to an additional million barrels per day. This, come December, will be a test case for OPEC’s strength, which has so far shown immense compliance. But the Russian producers may soon be running out of patience, which may put the bulk of responsibility on the largest player, i.e. Saudi Arabia.
Recall that Saudi Arabia has maintained a “do whatever it takes” approach for quite some time to bring about stability in oil prices, in a bid aimed at boosting it chances of the proposed Aramco deal. But if the Kingdom has any realistic chances of fetching the desired amount, it will have to aim at oil consistently above $60/bbl for 2020. This may prove to be Herculean, but also the only option left for Saudi Arabia. The US oil inventories and production, both have shown no signs of receding, and shale producers too are pumping at high levels. From what it appears, the “somewhat” in the overall bearish outlook, may soon be gone.