The outlook of oil has turned negative amid rising production and concerns over global economic growth.
After visiting a four-year high of almost $87 a barrel, the Asian benchmark Brent oil has fallen sharply, retreating about 28% to $61.71 a barrel this week. The outlook of oil has turned negative amid rising production and concerns over global economic growth. Mirroring its overseas trend, Indian futures prices too shed by more than 30% since the first week of October.
Worries of supply crunch on the prospect of tough sanctions on Iran and healthy demand from top oil consumers kept oil prices at multi-year highs earlier. Iran is the OPEC’s third largest producer contributing about three percent of the global oil output. Iran’s exports has fallen about 60-80% percent since the U.S withdrawn the 2015 nuclear deal and re-imposed sanctions.
However, the overall supply drop in the market has not materialised as the U.S unexpectedly given broad exemptions to the major Asian oil consumers which permits them to continue buying oil from Iran. The sanction waivers to top Iranian oil importers could allow them to rise purchase again after November which has reduced fears of a supply shortage. China, India, South Korea, Japan, Turkey, Taiwan, Greece and Italy are the eight counties who are permitted to import oil from Iran.
An increased global production, worries over demand amid trade dispute between U.S and China weighing the sentiments as well. The increasing sign of slow down across Asia’s biggest economies may get worsen the oil market situation later.
The combined output of OPEC and non-OPEC producers are now at highest levels. Output from the U.S has surged to hit a record of 11.6 million bpd, making the country as the world’s top oil producer ahead of Russia and Saudi Arabia. It is also expected that U.S production will climb above 12 million barrels per day by next year. Production from the second largest producer, Russia is also near its 30 year high of 11.41 million barrels per day.
The combined production of the world’s top three producers Russia, U.S, and Saudi Arabia is now more than 33 million bpd for the first time in October, sufficient to meet more than a third of the global consumption of about 100 million bpd. Growing output from top producers rising concerns over a global supply glut.
The slow pace of economic growth in the Asia’s largest economy China is also influencing prices. China reported a slow growth in manufacturing and drop in car sales recently indicating the trade conflict with U.S is starting to put strains on their economy. Japanese economy too contracted in the third quarter hit by natural disasters and decline in exports.
A weak rupee has resulted in rising cost of imports to India shifting purchases from the country. Reportedly, car sales from India are set to register fall this year. OPEC and its allies were earlier talking about lifting daily production to offset the impact of Iran sanctions but now discussing the need of cutting output to curb oversupply.
Looking ahead, continuing deceleration of economic activity would curtail energy demand further. Shrinking demand growth and elevating U.S shale production pointed towards an emerging surplus which likely to pressure prices further. Meanwhile, OPEC and other top oil producers are perhaps to withhold crude output by next year to tighten supply and prop up prices. On the price front, the U.S WTI futures are likely to trade inside $66-47 a barrel levels in the immediate run. A direct drop below $47, expect sharp liquidation in prices towards $42 a barrel later.
(The author is Head – Commodity Research at Geojit Financial Services. Views expressed are the author’s own.)