Oil prices appear to be trapped within a relatively narrow range, squeezed between competing forces on both the upside and downside.
Indeed, the WTI is stuck between $50 and $60, and Brent is stuck between $60 and $65. Nigeria’s Bonny Light also treads on the $60-$65 band.
Nigeria’s 2019 budget, which was signed by President Muhammadu Buhari in May, was benchmarked on oil production of 2.3 million bpd (including condensates) and an oil price of $60 per barrel.
In October 2018, Brent crude hit a record high of $86.74 per barrel, a development that spurred the Federal Executive Council to peg the price of crude oil for the budget at $60 per barrel, up from $50.5 for the 2018 budget.
Supply outages, OPEC+ cuts and geopolitical unrest on the one hand, but capped by weak demand and a looming return of surplus on the other, continue to make oil range-bound.
Already, OPEC’s efforts to boost oil prices may become even more challenging next year, with increasing competition for market share from the higher non-OPEC output, the group’s first 2020 forecast shows.
Meanwhile, escalating trade tensions between the US and China are sending signs of weakening global demand and growth outlook, analysts said.
“Oil markets have been becalmed within tight ranges amid falling volatility,” Standard Chartered wrote in a note. “While front-month Brent has settled higher on seven of the past eight trading days, the pace of the ascent has been glacial.”
With shale drilling largely a loss-making enterprise, investors are growing wary and are demanding more caution, even as heightened trade war – and consequently, lower oil prices – is expected to increase the pressure on drillers.
“The US and China are the world’s two largest oil consumer countries, together accounting for roughly a third of global oil demand and half of the demand growth expected this year,” Commerzbank said in a note. “As such, an economic downturn sparked by new punitive tariffs is unlikely to leave oil demand unscathed.”
Commerzbank pointed out that while the International Energy Agency (IEA) recently kept its demand growth forecast at about 1.2 million barrels per day (mb/d), the figure – already downgraded from previous estimates – was rather optimistic and hinged on a resolution to the trade war.
As a result, it seems likely that the agency will now be forced to slash its demand estimate for 2019.
“Depending on how sharply the forecast is lowered, there is a risk of an oversupply in the final quarter of this year, and of an even bigger one next year,” Commerzbank said.
At that point, OPEC+ will face a conundrum – whether to keep its current arrangement in place and risk a price crash or take on a heavier burden by cutting production even deeper.
A big uncertainty at this point is whether or not U.S. shale will live up to the heady production growth forecasts that everyone has assumed.
Last week’s meltdown of energy stocks is clear evidence that the sector has decidedly fallen out of favour with Wall Street. Job cuts and spending pullbacks are spreading, and production growth has already moderated.