Are Oil Prices Still Too High?

Are Oil Prices Still Too High?

China’s oil demand growth is expected to slow dramatically this year, a trend that should have a substantial impact on the global oil market.

CNPC said that oil demand in China will expand by 2.4 percent in 2020, less than half of the 5.2 percent growth rate seen in 2019, as reported by Bloomberg. That will also be the weakest growth rate since the global financial crisis a decade ago. “Negative impacts on the economy from U.S.-China trade frictions won’t be rooted out in the short term,” CNPC said.

At the same time, China has amassed an enormous strategic oil reserve in the last few years, growing from 191 million barrels in 2015 to as much as 800 million barrels last year. China’s import demand was bolstered by this stockpiling; should it slow down or cease altogether it would amount to another knock on demand.

Demand for gas is also expected to deteriorate to a four-year low. CNPC expects gas demand to grow by 8.6 percent, down from 9.6 percent last year. Meanwhile, China’s domestic gas production is expected to increase, by 8.2 percent, year-on-year. China recently surpassed Japan as the world’s largest buyer of LNG, so the deceleration in demand and the increase in domestic supply will act as a drag on the already-weak LNG market.

Press reports have rightly been focused on conflict in the Middle East, but oil traders are clearly discounting the prospect of supply disruptions. Oil prices are trading below where they were before the Soleimani assassination, which suggests that the markets are much more concerned with weak demand and oversupply than they are with geopolitical risk.

Some analysts have cautioned against complacency. “The risk of the conflict flaring up again should not be ignored, so a certain risk premium on the oil price is still appropriate,” Commerzbank said in a note. “That said, the market appears to be focusing on other issues at present.”

The investment bank went on to add that the Phase 1 trade deal probably won’t provide a boost to demand. “At best, it is likely merely to prevent any further slowdown in growth,” analysts at Commerzbank said.

The IEA and OPEC release monthly data later this week, and the IEA’s executive director recently suggested that oil demand could grow by a little more than 1 million barrels per day this year, with “the implied surplus on the oil market to be on a similar scale,” Commerzbank said.

“From a purely fundamental perspective, in other words, the oil price should be lower than it is at present,” the bank concluded.

That sentiment was backed up by other oil watchers. “It is important to look beyond the rhetoric of the headlines and focus on market fundamentals – including the continued rise of non-OPEC oil supply led by US shale, and flat demand growth – which all points to a surplus, not a deficit, in oil balances in 2020,” says Bjørnar Tonhaugen, Head of Oil Market Research at Rystad Energy. “Prospects of Brent prices slipping below $60 per barrel – even in the midst of an intense geopolitical flare up in the Middle East – are entirely plausible.” The firm said that OPEC will be under pressure to deepen cuts in order to head off another slide in prices.

But not everyone agrees with this assessment, particularly because U.S. shale drillers are under intense financial pressure and the rate of drilling has already slowed dramatically.

Bahrain’s oil minister Sheikh Mohammed bin Khalifa Al Khalifa spoke at a CNBC-hosted conference in Saudi Arabia, where he said that expectations of ample supply “will have to shift,” and that there could be “a scarcity impulse in supply.” He pointed to the sharp slowdown in upstream investment in recent years, which could finally begin to show up in the market as the queue of long-dated projects becomes increasingly thin. “We can see that investments are not as bold as they once were, then perhaps that inflection point isn’t that far away,” he said.

But his assertion, he said, is also largely based on the increasing odds of a significant slowdown in shale growth. “So, my recommendation is all eyes on U.S. production,” he said.

By Nick Cunningham of

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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