Despite frequent geopolitical risks since 2019, oil prices have remained weak as concerns about international trade and a slowdown in the global economy have led to a sharp drop in demand expectations, offsetting the impact of risk factors. A quantitative analysis shows that the risk premium of crude oil is underestimated by US$7/barrel due to expected weak market demand.
With Saudi Arabia’s recent sharp rebound in production, concerns about global oversupply have been heightened. Recently, Saudi Arabia has made an offer to Brazil, hoping that the country will join OPEC. However, a Brazilian statistical data shows that the country’s production is expected to increase by 2.4 million barrels per day in 10 years, reaching 5.5 million barrels per day, ranking among the world’s top five oil producers. This is contrary to OPEC’s policy goal of reducing production to maintain oil prices.
The market is currently paying attention to the progress of the international trade situation, which will have a key impact on the trend in 2020 and 2021.
Low demand expectations have made the risk premium of crude oil undervalued by at least US$7/barrel
2019 Since then, there has been no shortage of geopolitical risk factors in the oil market. In addition to the attack on the Saudi oil field, which caused the country’s production to drop by 5.7 million barrels per day, Libya’s domestic political turmoil has caused the country’s largest oil field, the Sharala Oil Field, to face the possibility of closure many times. In addition, tensions between the United States and Iran continue to simmer. Iran has repeatedly stated that it may block the Strait of Hormuz, which puts one-third of the world’s crude oil exports at risk.
But even so, the overall trend of oil prices this year has been weak. Oil traders are not ignoring geopolitical risks, but they are more worried about an economic slowdown caused by international trade tensions than supply disruptions caused by the situation in the Middle East.
OPEC production rebounded from an eight-year low, inviting Brazil to join its long-cherished wish may not come true o:p>
Another factor offsetting the risk premium is the recent pickup in Saudi production. OPEC’s crude output rebounded from an eight-year low as Saudi Arabia quickly restored output from the attack on its oil fields.
OPEC+ will hold a meeting in December to discuss whether further production cuts are needed to support oil prices amid weak demand. The market generally expects OPEC+ to extend the production reduction agreement that expires at the end of March 2020. At the same time, many institutions expect OPEC+ to seek further production cuts at this meeting.
The country with the largest decline in production in October was Ecuador, where domestic unrest led to the disruption of the country’s main oil production facilities. Previously, Ecuador’s Energy Minister stated that the protests in Ecuador reduced oil production by 520,000 barrels per day, of which private sector production decreased by 83,000 barrels per day. This brought the country’s output down to 120,000 barrels per day. But even that was not enough to offset a rebound in Saudi output.
It is worth noting that Ecuador will officially withdraw from OPEC in 2020, which may lead to a further decline in OPEC’s production reduction implementation rate.
At the same time, there is news that Saudi Arabia has informally invited Brazil to join OPEC. Data shows that crude oil production in Brazil’s offshore oil fields has been growing rapidly, with output reaching a record high of 3.1 million barrels per day in August. Joining would make Brazil the third largest OPEC oil producer after Saudi Arabia and Iraq.
UAE Minister of Energy: The international trade situation will have a decisive impact on the direction of oil prices in 2020 and 2021
At present, the market is paying attention to the progress of the international trade situation, which may cause the market to shift some of its attention to the risk premium of oil prices.
Last Friday, the U.S. non-farm data and China’s manufacturing data were better than expected, and at the same time, there was good news about international trade, which pushed the stock to a four-day high, recovering most of last week’s losses.
Xinhua News Agency reported in Beijing on November 2 that on the evening of November 1, a member of the Political Bureau of the CPC Central Committee, Vice Premier of the State Council, and the Chinese side of the China-US Comprehensive Economic Dialogue The leader, Liu He, was invited to have a phone call with U.S. Trade Representative Lighthizer and Treasury Secretary Mnuchin. The two sides had serious and constructive discussions on properly resolving their respective core concerns and reached a principled consensus. The two sides discussed the next step of consultation arrangements.
Amid ongoing geopolitical tensions, the international trade situation will determine the outlook for oil demand in 2020 and 2021.
In addition to supply and demand factors, geopolitical changes, economic prospects and international trade situations will play a huge role in determining the size of oil demand in 2020. Especially when clear signals emerge from the international trade situation, the expectations for oil demand in 2020 and 2021 will become clearer.
International trade tensions have weakened expectations for global oil demand growth. In October, the International Energy Agency lowered its forecast for global oil demand growth in 2020 and its demand for OPEC crude oil due to a further slowdown in global economic activity, leading to market speculation that OPEC will increase production cuts in December.
As OPEC’s third largest oil producer, the United Arab Emirates is working hard to comply with OPEC+’s production reduction agreement and maintain a production quota of 3.07 million barrels per day. At the same time, Mazrui called on other oil-producing countries to also comply with the production reduction agreement. Mazrui was alluding to Nigeria and Russia. Although OPEC had previously raised Nigeria’s production quota, the country still failed to reach it.Production goals. Russia’s production in October was 11.23 million barrels per day, which was also higher than the 11.19 million barrels per day stipulated by OPEC. </p
