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Oil has plunged 40%. That says a lot about the global economy in 2019

27/12/2018
Reading Time: 3 mins read
oil revenues and oil prices,ghanatalksbusiness.com
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The forces that pushed oil sharply lower at the end of 2018 aren’t going away.

US crude prices have crashed more than 40% since hitting four-year highs above $76 a barrel in October. Brent crude, the global benchmark, is now trading near its lowest level since August 2017.

Oil is an important bellwether of future growth. The sharp decline reflects concerns that the global economy is weakening, as well as surging US crude output and falling stock prices. Not even production cuts by OPEC and its partner states have been able to reverse the trend.

The dynamic could make for a wild 2019.

Global slowdown

International Monetary Fund economists expect global growth to slow to 2.5% next year from 2.9% in 2018. Reduced economic activity means less demand for energy products.

The International Energy Agency has warned of “relatively weak” demand in Europe and developed Asian countries. It also flagged a “slowdown” in demand in India, Brazil and Argentina caused in part by weak currencies.

OPEC warned this month that demand for its oil next year would be about 1 million barrels a day less than in 2018.

“The dominant factor on the demand side will be the economic outlook,” said Robin Mills, CEO of energy consulting firm Qamar Energy. “It will receive some support from lower oil prices but overall the global economy appears likely to slow.”

OPEC and Russia

OPEC and its allies agreed earlier in December to remove 1.2 million barrels a day from world markets.

Members of the cartel pledged to reduce their production by 800,000 barrels per day for six months beginning in January. Russia and other partners promised to slash an additional 400,000 barrels per day.

Reaching a deal caused prices to shoot higher, but the effect wore off within days.

The price of oil could determine what happens when the agreement expires in June.

“If it remains below $60 a barrel you would expect OPEC to look to extend the December agreement,” said Russ Mould of online investment platform AJ Bell. “If it has surged back toward say $80 a barrel it may then look to increase output once more.”
Iran waivers

The United States surprised investors in November when it granted eight countries temporary sanctions waivers that allow them to buy from Iran without fear of punishment.

The waivers expire in May, and it’s unclear whether they’ll be extended.

What happens next is “very difficult to predict, because the United States just did an almost complete about-turn on Iran policy,” said Spencer Welch, oil markets executive director at IHS Markit.

“The United States does not want the gasoline price to go to high, so it is likely that US policy will be influenced by what the market is doing, which will be influenced by how effective the OPEC cut is,” he added.
US oil boom

The United States became the world’s largest producer of crude oil in September, overtaking Russia and Saudi Arabia for the first time since 1973.

The feat demonstrates how the US shale oil boom has reshaped the global energy landscape. American oil output has more than doubled over the past decade.

It has even raised questions about OPEC’s ability to influence prices.

“One of the drivers behind the change in dynamics that has resulted in OPEC losing influence over the oil industry is the emergence of the capability of outsiders to produce oil,” said Jameel Ahmad, global head of currency strategy and market research at FXTM.

“None have been more prominent in this arena in recent years than the United States,” Ahmad said.

Credit: CNN

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