With all the volatility in stocks and bonds over the last few months, oil hasn’t gotten much attention. Drivers will have noticed gas is cheap right now, as oil prices have fallen considerably over the last several months. But will it stay that way? Right now the IEA is forecasting solid global demand growth in 2019, which should keep prices strong, but that forecast is vulnerable to some big swings. The IEA warns that since the signals from the global economy are not strong, the forecast could have some considerable downside.
FINSUM: Oil will probably dance to the music of the economy this year. It does not seem to be a significant leading indicator at the moment.
Oil has been whipsawing all over the place lately. For the last several weeks, oil has mostly fallen, with some short term big rallies along the way. One of those was just a couple days ago when Saudi Arabia and Russia announced an agreement to cut output. However, the bottom has fallen out of the commodity as Saudi Arabia’s energy minister announced that he would only favor a small cut. This led to big doubts about whether the efforts will actually lower supply, sending prices spiraling down 5%.
FINSUM: This seems to be a direct consequence of the US’ ability to boost its production to offset any declines by OPEC. Accordingly, Saudi Arabia doesn’t want to lower its revenue by cutting only for the US to take advantage.
If you haven’t been paying attention, something very interesting has been happening in the oil market. That development is that the US has quietly replaced Saudi Arabia as the world’s largest oil producer. That is a major development because the US is outside of OPEC and thus is a major counter-balance (headache) to Saudi Arabia and OPEC’s ability to control oil prices. Each time Riyadh wants to cut output to boost prices, the US can raise its production to offset the cut.
FINSUM: The US is in a strategically superior position for the first time in a very long time. This whole dynamic is symptomatic of the new era of bountiful oil. We ultimately believe that prices will stay well below $100 for several years to come because of how supplied the market is.
Oil has been falling for several weeks, with prices dipping below the $50 mark for US crude. However, over the last couple of days, the price of black gold has surged. Investors may be left wondering what it all means. The answer is that Saudi Arabia and Russia announced their intentions to work together on another output cut, which sent prices surging. On the sidelines of the G-20, the Saudis and Vladimir Putin agreed to extend their output cuts. At the same times, Canada announced a curb on production.
FINSUM: Just as we have been saying, current movements in oil are particular to the sector and not indicative of the wider economy.
The oil market has been in an extremely rough patch over the last several weeks. Just a couple months ago, many were talking about the return of $100 oil. Suddenly, prices are just half that. The question is where is crude headed next. Well, the Saudis seem committed to keeping it weak, as the Kingdom, which leads OPEC, has just announced that it will not cut production. The catch is that it said it will not do so alone, which keeps the door open to another coordinated OPEC-wide cut, such as happened several months ago.
FINSUM: The big difference between a coordinated cut now and the one from a couple years ago is that the world looks much closer to recession a present, which means demand could flatten or fall even if output lowers. That means producers could lose revenue by cutting (instead of the difference being made up by price gains), which makes a big difference.