Oil prices dropped too much, but they can be self-correcting

Oil&Gas Materials 26 November 2018 18:00 (UTC +04:00)

Baku, Azerbaijan, Nov.26

By Leman Zeynalova – Trend:

Oil prices fell by 7-8 percent on November 23 on market fears of oversupply, but the UK-based Capital Economics consulting company suspects that producers will start to withhold exports in the coming months, putting a floor under prices.

The main catalyst for the dramatic slump in the oil price last week appeared to be tweets from President Trump thanking Saudi Arabia for facilitating lower oil prices, said a report from the company.

“Production in OPEC member states, Russia and the US has surged recently. And at the same time, US crude stocks have been rising, the US granted waivers on Iran sanctions to eight large oil importers and there are mounting concerns about trade tensions and global economic growth more generally,” the company said.

As it happens, Capital Economics believes that slower global economic activity would be a factor weighing on oil demand in 2019 and that the market would move into surplus.

“To be clear, we are not expecting a hard landing for the global economy, just weaker growth. What’s more, it appears inevitable that Saudi Arabia and Russia will lower output moving into 2019 and there are already tentative signs that price-sensitive US drilling activity is stalling,” said the UK-based consulting company.

And, not to forget, the report shows that there remains the risk of a sharp drop in Iranian production, not least because the waivers are meant to be only temporary.

“As such, we are retaining our forecast that Brent will stand at around $60 per barrel by end-2019. Of course, prices could fall further and in the near term this may well happen. But low prices in and of themselves can be self-correcting as they deter production and bolster demand,” said the report.


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