The spread of the deadly virus in China and the clampdown in travel may weigh on fuel demand.
Crude oil prices in the Indian futures market gained a whopping 38 percent in the last year. Despite weak global demand and rising production, US WTI oil and the Asian benchmark Brent rallied 34 and 22 percent respectively.
Oil prices have been under pressure ever since the US-China trade war started seventeen months back. The trade spat between the world’s top two economies hit the global economic sentiments adversely.
A drop in vehicle sale and a slump in the automobile industry due to higher tariffs and prolonged uncertainty about trade policies affected the global oil demand.
However, the threat of supply disruption due to unsettled tensions in the Middle East overshadowed weak demand and rising production. Breakthrough in US-China trade talks and output cut pledged by OPEC plus allies also supported prices.
Oil prices started gaining since the start of the previous year and it went up to $66.60 a barrel by April. This was due to an attack on Saudi Arabian oil tankers at the most important oil transport waterway. This incident created hostilities between western countries and the Middle East.
Speculators largely bet on oil in anticipation that the vulnerabilities in the security of the key oil shipping passage may dent export. In addition, the armed drone attacks by Yemen’s Houthi Rebels at Saudi oil installations have also lifted the sentiments of oil.
However, easing Middle East tensions and feeble demand outlook pulled down prices to $50 a barrel by September. To stabilise global oil prices, OPEC and other producing countries, including Russia, have cut output by 1.2 million barrels per day since last January.
Supply cuts from OPEC countries were balanced by increased shale oil supply from the US. Until a few years back, Saudi Arabia controlled the global oil prices. But now, increased shale oil exploration through advanced drilling techniques has made the US a vital player in the oil market.
As per EIA data, the US now became a net petroleum exporter with output rising to all-time high levels. The report also shows oil inventories held in OECD countries are currently placed above the five-year average of 9 million barrels.
At the same time, oil jumped to a six-month high in the first week of 2020 but, it sharply nosedived later on subdued demand forecast. The spread of the deadly virus in China and the clampdown in travel may weigh on fuel demand.
Easing tensions in the Middle East and a surplus global oil market are also keeping prices at lower grounds.
Looking ahead, oil prices remain under pressure on expectations of lower demand and higher supply. As per EIA data, global oil inventories continue to rise during the year as well. The agency foresees global oil supply will be 1.6 mbpd and the expected consumption is 1.3 mbpd.
However, unlike previous years the US will not dominate the global oil markets this year. A slowdown is expected in the US shale oil sector, instead, countries like Norway, Brazil, Canada, Australia, and Guyana can add more oil into the market.
The rising new barrels from non-OPEC producers can overshadow any supply disruption, especially from the OPEC cartel.
On the price front, a congested trade inside $66-$50 a barrel is expected initially. A direct drop below $50 would be an early signal of sharp liquidation pressure.
First published in Moneycontrol.