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$70 Oil Could Be Right Around The Corner

Oil markets have always been cyclical, and now even more so with advanced electronic trading, more speculation (which often results in wider oil price swings) and more producers, including the resurgence of U.S. oil production, now reaching over 11 million barrels per day. Added to the cocktail of uncertainty are also a myriad of geopolitical and economic factors, including ongoing U.S.-China trade tensions, angst of U.S. Federal Reserve policy, and wars in Syria, Yemen and elsewhere, which make it increasingly difficult to forecast the direction for future oil prices.

This dynamic has proven true over the past two-and-a-half months as market pundits have watched (often in amazement) how global oil prices reached multi-year highs in October, only to quickly plunge by 40 percent to date. Prices for global oil benchmark, London-traded Brent crude futures were trading in the mid-$80’s range in early October, while U.S. oil benchmark, NYMEX-traded West Texas Intermediate (WTI) crude futures were hovering in the mid $70’s-range, a comfortable price point for U.S. shale oil producers, and around $25per barrel above the average oil production break-even point for shale producers.

However, amid all of the dismal economic news and problematic geopolitical developments, a group of bankers are sounding optimistic once again over future oil price forecasts. On Friday, Bloomberg said that many of the world’s largest banks are forecasting a rebound in oil prices next year as fears of a recession prove misplaced.

According to a Bloomberg survey of oil analysts, Brent will average $70 a barrel in 2019, almost a third higher than its price on Thursday. Michael Cohen, head of energy and commodities research at Barclays Plc in New York, said “we could even see something similar to a V-shaped recovery next year, on two very important conditions. One, that the reduction in OPEC exports leads to a reduction in inventories. And two, that we don’t see a further deterioration in macroeconomic conditions.”

The Bloomberg report added that despite a recent darkening outlook for the global economy amid prolonged trade disputes between the U.S. and China, and as the U.S. Federal Reserve embarks on tightening monetary policy, most commentators aren’t seeing an actual recession biting the oil market next year. The median forecast of 24 oil analysts in the Bloomberg survey projects that Brent crude futures will average exactly $70 a barrel in 2019. The price on Thursday was about $53.50 while the average so far in 2018 has been about $72. Meanwhile, the median forecast for WTI is $61.13. WTI futures traded at about $45.27 on Monday.

Michael Tran, a commodities strategist at RBC Capital Markets LLC, said that prices are nearing a bottom, while ““global supply and demand should reach a fine balance next year.” Bloomberg added that in the absence of a severe economic slump, most analysts anticipate that world oil consumption will continue to expand at roughly the pace seen in recent years, powered by emerging economies such as China.

However, though the analysts surveyed by Bloomberg give credence to ongoing trade tensions between the U.S. and China, it appears that unless a new trade deal is reached by the self-imposed March 2 deadline between the two sides, global oil demand will indeed recede amid more sluggish global economic growth, led by a slow down in Chinese manufacturing and exports. Since the U.S. and China are the world’s two largest economies, ongoing trade tensions are already hitting global supply chains, particularly in Asia. Numerous manufacturing companies have already exited China for greener pastures, including setting up shop in neighboring Southeast Asian economic tiger Vietnam.

Japan, the world’s third largest economy and a major importer of both crude oil and liquefied natural gas (LNG), for its part, is already suffering economic fall out from the U.S.-China trade spate. In September, the Tokyo-based Nikkei Asian Review said that at least 60 percent of top Japanese companies expected earnings to be hurt by the trade war. If Washington and Beijing can’t reach a formal trade war cease-fire by March 2, that 60 percent figure could likely include nearly all top Japanese companies, while Japan’s GDP would also take a hit, as would oil demand growth in the country.

A protracted trade war between the U.S. and China will also hit other OECD members. Last month, the group of developed economies downgraded its global growth forecast from 3.7 percent to 3.5 percent in 2019 and 2020. However, that growth forecast could likely be readjusted if the U.S. hikes existing tariffs on $200 bn worth of Chinese products to as high as 25 percent while slapping fresh duties on another $267 bn worth of Chinese exports would exacerbate the problem.