Oil prices fall

Oil prices fell on Wednesday after industry data showed U.S. stockpiles of crude unexpectedly rose, and as economic growth slowed, especially in Asia, amid the escalating trade dispute between the United States and China. 

Background 

Oil prices have been one of the most watched trends in economics during the 21st century. From 2000 to 2008, the price of oil saw an unprecedented spike, going from under $25 per barrel to almost $150 per barrel. Rapidly increasing demand in emerging economies such as China and India and production cuts by the Organization of Petroleum Exporting Countries (OPEC) in the Middle East drove the price of oil to record heights. 

From 2010 until mid-2014, world oil prices were around $110 a barrel. However, the price of oil has fallen significantly in the recent years. It is now around $60. To address the sluggish prices, OPEC nations came to an agreement in November 2016 to cap their output until the oil glut was reduced. In May 2017, they agreed to extend that deal by nine months. This isn’t the first-time oil prices have been severely hit due to a glut. Prices of oil fell in the 80s due to falling demand. It resulted in a six-year decline in the price of oil. 

On January 2018, for the first time in three years, the price of oil reached a record high of $70 per barrel. The last time oil was valued this much was in December 2014. Sparked partially due to sharp decline in the global equity markets, oil prices fell for a sixth day on February 9, 2018. The price of Brent oil was at $64.34 a barrel, down from $64.90 and U.S. WTI crude was at $60.53 from $61.25. 

Analysis 

Brent spot crude oil futures dropped 30 cents, or 0.4%, to $73.91 a barrel on Wednesday, adding to a 1.8 % loss in the previous session. U.S. crude futures were down 38 cents, or 0.6%, at $68.38 a barrel. Brent fell more than 6 percent in July, while U.S. crude futures slumped about 7 %, the biggest monthly declines for both benchmarks since July 2016. Weighing on prices was a report by the American Petroleum Institute (API) that showed domestic crude inventories rose by 5.6 million barrels last week.

Furthermore, the signs that a supply disruption in the Bab al-Mandeb Strait in the Red Sea could be resolved also weighed on prices. Yemen’s Houthi group said it was ready to halt attacks in the Red Sea to support peace efforts. Prices are also falling in the physical market, where top oil exporter Saudi Arabia is expected to cut prices for all crude grades going to Asia in August.

Markets are also being pulled lower by concerns over slowing economic growth because of the trade war. Manufacturing across Asia slowed in July, deepening concerns about the region’s economic outlook as the U.S.-China trade conflict sent shudders through their trading partners. This slowdown is starting to show in the container market, in which the vast majority of finished goods are imported and exported. The Harpex container index has fallen by 10% from its 2011 highs in June, to a last close of 613, its lowest level since March.

There were recent reports that indicated US and China may restart negotiations to defuse the trade war between the two countries. However, the market largely overlooked these reports and the Asian markets are continued to be affected. Moreover, analysts predict that an end to the ongoing trade war could boost overall oil-market demand.

According to a production survey, Russia and the OPEC boosted output in July. The survey showed OPEC members boosted output in July by 70,000 barrels per day (bpd) to 32.64 million bpd, a high for the year. However, official data from the U.S. Energy Information Administration (EIA) is due later on Wednesday.“API ... showed a big build. So all eyes will be on the EIA data this evening,” said Greg McKenna, chief market strategist at AxiTrader. A survey by a news agency showed that oil prices are likely to hold fairly steady this year and next. OPEC has pledged to offset the loss of supply from Iran, the group’s No. 3 producer. The loss of oil supply from Iran is due to the sanctions imposed on Iran after the US withdrew from the 2015 nuclear deal.

Counterpoint

However, looming U.S. sanctions have already started to cut Iranian exports. Iran said U.S. President Donald Trump was mistaken to expect Saudi Arabia and other oil producers to compensate for supply losses caused by U.S. sanctions. 

Assessment

Our assessment is that the drop in oil prices is due to an unexpected rise in crude stockpiles. We feel that the increased output from OPEC and the United States will meet growing demand led by Asia and help offset supply disruptions and fairly stabilize oil prices this year. Moreover, If talks between the US and China to defuse the trade war are successful, we believe it could boost overall oil-market demand.