Oil Prices Decline Amid Weakening Demand
Oil markets are experiencing a trend reversal in May, as investors are concerned about the decline in oil demand amid worries around a global recession. From January to late April, oil prices moved in a bullish trend as the markets were weighing risks related to OPEC production cuts and US sanctions against major oil producers, such as Venezuela and Iran.
However, the price action went through a u-turn in late April, falling by over 15% since then. Before the trend reversal, oil prices have generated a 45% return in the first four months of 2019.
Slower Economic Growth Puts Pressure on Oil Demand
Most of the banks, investment firms, and consultancy agencies have reduced their outlooks for oil prices amid growing concerns over a global economic recession. British banking giant Barclays said earlier this week that it had lowered its economic growth forecast for the US, China, Brazil, and India, which account for a combined share of over 75% of global oil demand growth. The bank revised down its oil demand growth outlook by 300,000 barrels per day (bpd) to 1 million bpd.
There is potential for further downside to demand, which means this will likely be the worst year for oil demand growth since 2011.
On Wednesday, US-based Goldman Sachs said that the slowing economic growth and decreasing oil demand was the largest driver behind the bearish trend of oil prices.
Fereidun Fesharaki, chairman of energy consultancy firm FGE, stated that the decrease in demand is the result of a “general fear of an economic downturn.” He warned that an economic recession is not that far if the trade war between the US and China continues.
Earlier this week, FGE also reduced its global oil demand growth outlook by 300,000 million bpd to 1 million bpd.
API Reports an Increase in SupplyOn Wednesday, oil prices have declined as the US Energy Information Administration (EIA) cut its outlook for global oil demand growth this year while the American Petroleum Institute (API) announced an increase in crude stockpiles, which surprised the markets.
US crude oil WTI futures fell 2.5% to $51.95 as at 01:00 AM UTC. Brent oil futures have declined by 2.26% by this time.
In a separate report, the API stated that US crude stockpiles increased by 4.9 million barrels during the week ended June 7 to 482.8 million barrels, while the analysts expected a decline by 481,000 barrels.
Elsewhere, Suhail bin Mohammed al-Mazroui, energy minister of the United Arab Emirates (UAE), stated yesterday during the International Economic Forum of the Americas that OPEC countries were about to reach an agreement to maintain production cuts.
OPEC members initially planned to meet on June 25 to update the production policy for this year. However, Russia proposed to move the date to July 3-4.
We are working the dates. […] To me it doesn’t matter. We’re talking about a separation of two weeks. The most important is what we know today and what we know today tells us that we need to extend, in my view.
Goldman Sachs stated in a note that OPEC might extend the supply cuts due to the uncertain macroeconomic future and volatile oil production from Iran among others.
The investment bank said:
We expect such an outcome to only be modestly supportive of prices with our third quarter Brent forecast at $65.5 per barrel.
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