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What Global Oil Markets Really Want

What Global Oil Markets Really Want
Tuha Oil Field, Turpan, Xinjiang, China
Image by
Yoshi Canopus

On Monday morning in early trading, prices for global oil benchmark Brent crude dropped after China released data that showed its economy is still slowing amid the ongoing trade war between Beijing and Washington.

Media in China reported that profits at industrial companies in the country dropped for the second straight month in September.

In early trading, Brent crude dropped 34 cents, 0.4%, at $61.79/barrel. However, prices increased by 4% last week, the largest weekly gain since September 20.

US oil benchmark West Texas Intermediate (WTI) crude futures were down also on Monday in early trading, dropping 26 cents, 0.5%, at $56.39/barrel. Last week, WTI prices increased more than 5%.

For most of the year, the elephant in the room for global oil markets has been both economic contraction due to the trade war and weakened global oil demand from that contraction. Prices have even shrugged off a collective effort by the so-called group of OPEC+ oil producers, which includes Russia and Saudi Arabia, that is still cutting oil production by around 1.2 million barrels per day in an effort to support prices.

The OPEC+ agreement runs to March 2020, while producers meet on December 5-6 to review the deal. Producers could also deepen that production cut at its December meeting, but the group has diverging interests.

Saudi Arabia, the world’s third largest oil producer and largest oil exporter, wants to focus first on boosting adherence to the group’s production-reduction pact with other members, sources said last week.

Saudi Arabia is also bearing the largest share of the production cut. It’s pumping around 300,000 barrels per day less than cuts specified in the agreement.

Iraq and Nigeria, both OPEC members, are among the countries that have failed to comply with pledged output reductions. The consensus is that Saudi Arabia and other producers will not cut more production less until Iraq and Nigeria fall into compliance.

However, what’s different this time in global oil markets is that OPEC, albeit with help from Russia, the world’s second largest oil producer after the US, has been unable to micro-manage oil markets as they have in the past.

Two factors can largely be attributed to the group’s diminished oil markets power. First, the increase in US shale oil production, and the trade war between the US and China.

However, as a possible so-called phase one trade deal looks increasingly like it will be reached, oil prices should receive more support both from the psychological impact of a deal and from any associated, but likely limited, uptick in global oil demand.

In the long term, however, only a cessation of trade war hostilities will give oil markets what they really want, an increase in economic growth and its knock-on effect of increased oil demand. Anything less than a full-fledged trade war armistice will continue to see markets move back and forth, with more downward pressure, as they’ve done for the past year.

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