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Crude oil sell-off continues

By David Morrison  |  18/12/2018 15:55
”crude

Oil prices fell sharply again today in a move which saw the front-month WTI contract break below $50 to hit its lowest level since October 2017

WTI crude came within a whisker of breaking below $48 this morning. Today’s move means that oil is down over 36% since it hit a multi-year high back in early October this year. The latest decline comes despite the agreement earlier this month by OPEC members and a number of other significant producers to cut output by 1.2 million barrels per day (bpd). But there are a few problems with this. Firstly, the proposed cuts are not large enough to help balance future supply with demand, and secondly the burden of the cuts falls on Saudi Arabia.

Record production
 
Looking at the first issue: analysts estimate that it would take a sustained cut of around 2 million bpd to run down record-high inventories. On top of this, the world’s three major producers (the United States, Russia and Saudi Arabia) are pumping out oil at record levels. The US (which is not part of the OPEC+ cartel) is producing around 11.7 million bpd. Russian production comes in around 11.4 million bpd while Saudi output in November was 11.1 million bpd. The US has no intention of slowing down production which is forecast to hit 12 million bpd early next year. Meanwhile, Russia has only agreed to cut by 230,000 bpd and has warned that even this will take time to implement. That leaves Saudi Arabia to come up with the major share of the reduction. The problem here is that President Trump has made it abundantly clear that he favours lower oil prices and won’t take kindly to a large cut from the Kingdom. This puts an enormous amout of pressure on Crown Prince Mohammed bin Salman who has won the support of the US President, despite the former’s links to the murder of Saudi journalist Jamal Khashoggi back in October.
 
Demand slowing
 
So this is the supply side of the equation. The other factor to consider is future demand. A number of agencies and economic forecasters expect global demand growth to fall sharply next year. Some of this is a function of the US/China trade disagreement. But mostly it’s down to evidence of slowing economic growth worldwide. It doesn’t matter where you look, whether it’s across the developed or developing world, but as central bankers wind down their programmes of monetary stimulus, or acftively tighten monetary policy, growth is slowing. As a consequence, demand for oil is likely to decline as well.
 
Watch the Fed
 
Now, once again crude is looking oversold and it probably won’t take much of a trigger to lead to a sharp bounce. That could come tomorrow evening even if the US Federal Reserve hikes rates by 25 basis points. If the US central bank also releases a dovish statement and its FOMC downgrades its expectations for US growth and inflation, then the dollar could sell off and this should help to lift oil. But if the Fed comes across as too negative, any rally could be short-lived. Once again, the Fed has the potential to add some extra volatility to markets, just ahead of next week’s shortened holiday trading.
 
 
”wti  
 
Any information, analysis, opinion, commentary or research-based material on this page is for information purposes only and is not, in any circumstances, intended to be an offer of, or solicitation for, a transaction in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. Any person acting on it does so entirely at their own risk and GKFX accepts no responsibility for any adverse trading decisions. You should seek independent advice if you do not understand the associated risks.
 

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