by Xinhua writers Ma
Qian, Wang Naishui, Wang Wen NEW YORK (Xinhua) --
Downside risks persist for crude oil amid an
ongoing year-end rout in both benchmark prices, despite a pledge
led by the Organization of Petroleum Exporting Countries (OPEC)
to cut output next year.
Caution has grown among
investors on fears of a slack market stuck in oversupply and
weak demand. Amid the compounded concerns, crude has been
trading close to its 18-month low, with both benchmark prices
evaporating more than 40 percent since hitting their four-year
highs in early October.
As of Monday, the last trading session before Christmas, West
Texas Intermediate (WTI) sank to a trough of 42.53 U.S. dollars,
while Brent settled at 50.47 U.S. dollars, diving into a
There is widespread concern that the global market would be
faced with a supply glut in 2019, despite an agreement among
OPEC members and other major oil producing countries including
Russia to trim production next year.
The deal, signed on Dec. 7 in Vienna, stipulates an output
cut 1.2 million barrels per day during the first six months of
2019, with OPEC members pledging a cut of 800,000 barrels per
day, while non-OPEC producers pledged to reduce their output by
400,000 barrels per day.
However, investors remain skeptical whether the potential
reduction would mop up supply surplus, with major investment
banks flashing red lights.
The Brent crude is expected to average just over 69 U.S.
dollars a barrel in 2019, lower than a November forecast of
about 77 U.S. dollars, according to a latest poll of 13
investment banks by the Wall Street Journal.
The West Texas Intermediate (WTI) is projected to average
just over 63 U.S. dollars a barrel, down from the November
forecast of 70 dollars.
The survey came at a time of a marked speedup in production
growth this year by countries including the United States, Saudi
Arabia and Russia.
"In the end, OPEC+ interests came out first, as we expected,
and the rest of the world came second. Member countries have
their own budgetary and foreign exchange reserve issues, and
America is now energy independent," Francisco Blanch, head of
commodities and derivatives research at Bank of America (BofA)
Merrill Lynch, told Xinhua.
The output of seven major U.S. shale basins is expected to
hit 8.166 million barrels per day in January, thanks to the
biggest increase of 134,000 barrels per day since September,
according to a latest report of the U.S. Energy Information
Currently, the United States is the world’s top oil producer
by pumping an estimated 10.88 million barrels per day,
surpassing Saudi Arabia and Russia. U.S. oil inventories finally
shrank for the third consecutive week following increases for 10
weeks in a row, according to EIA data.
"The U.S. production numbers are very impressive," said
Raymond Carbone, president at the New York-based Paramount
Options, referring to things going on in the oil market
"creating a bearish storm."
With the continued increase in U.S. supply, Wood Mackenzie, a
U.K.-based research and consultancy firm, said in early December
it expected a year-on-year increase of 2.4 million barrels per
day in non-OPEC production.
"That compares to our forecast for oil demand to increase by
just 1.1 million bpd in 2019, leaving little room for a
significant increase in OPEC production next year and making a
production cut necessary to stabilize prices," said Ann-Louise
Hittle, vice president for macro oils at Wood Mackenzie.
The International Energy Agency projected a rather slow
global oil demand growth of 1.4 million barrels per day in 2019,
while the EIA forecast an estimated increase of 1.5 million
barrels per day.
It’s believed that such worries are attributable to deepening
concerns over slowing global economic growth amid signs such as
equities sell-offs and geopolitical challenges caused by global
trade tensions and U.S. sanctions against Iran.
"What has happened in my opinion recently is a confluence of
many non-oil fundamental issues including the geopolitical
issues," Saudi Arabian Energy Minister Khalid Al-Falih told
reporters in Riyadh earlier. OPEC and non-member producers are
expected to meet next in April 2019.
Oil consumption in emerging economies across Asia, such as
China and India, which account for roughly two thirds of global
oil demand, is expected to shrink due to a projected slowdown in
"Most major economies are likely to see decelerating
activity, with real GDP growth of 1.4 percent in both Europe and
Japan, and 4.6 percent growth in aggregate among the emerging
markets," BofA Merrill Lynch said recently.
The strong U.S. dollar has also put pressure on oil in recent
months, as constant stock market volatility pushed the
safe-haven currency higher and made dollar-denominated crude
The Federal Reserves’ fourth interest rate hike this year
further complicated the situation by fanning anxieties over
sagging economic growth.
The combined effect of a rising dollar and higher borrowing
costs has pared demand in key emerging market economies and made
investors shun risky assets aligned with the global economy,
including crude oil and equities.
In what is worse, a partial shutdown of the U.S. government
contributed to losses in equities, with the Dow Jones Industrial
Average plummeting 600 points while Nasdaq and S&P 500 entering
a bear market on Monday.
The crude futures market fell in tandem with equities, as
energy stocks account for around six percent of market
capitalization globally, according to Swiss financial
"The short-term pain of lower oil prices for companies and
producers can overshadow the long-term gains for oil consumers,
as in 2015. On 18 December, a 2.4 percent fall in energy stocks
contributed to an early gain in the S&P index being erased," the
investment bank said in a recent article.
Carbone also noted the link between oil prices and the
"One cannot discount the recent down moves in the equity
"We are back to a strong dollar during market turbulence as
well as equity prices reverting to a barometer of future
demand," the analyst said.
Analysts are also wary about what lies ahead after the
OPEC-led output curb expires in the second half of 2019, though
Al-Falih expressed optimism last week for the extension of the
OPEC-led December agreement.
"We will meet in April and I’m certain that we will extend
it," the Saudi energy minister said.
"We need more time to achieve the result."