Decline in oil prices seems increasingly overdone

Baku, Azerbaijan, Nov. 27

By Leman Zeynalova – Trend:

The annual average price forecast for Brent has been revised down and is now forecast at $73 per barrel and $75 per barrel for 2018 and 2019, respectively, Fitch Solutions Macro Research (a unit of Fitch Group) said.

“This compares to our previous forecast of $74.5 per barrel and $81 per barrel. The fundamental outlook has deteriorated since our last oil price outlook, largely due to the US softening its approach to sanctions on Iran: our views on supply and demand are not radically altered, but the global balance has tipped to surplus,” said a report released by the company.

Fitch Solutions believes that oil may face further pain in the near term, but the company’s 12-month outlook on the market is bullish from current levels.

“The decline in prices looks increasingly overdone and sentiment is overly bearish, given the fundamentals. Markets appear to be pricing an aggressive slowdown in economic activity and oil demand. Growth is slowing, but demand from emerging markets (Ems) remains generally strong. And while supply is looser, cut backs from OPEC+ in December and ongoing declines in Venezuela and Iran should help Brent to recover in the coming months.”

Oil is also being dragged down by the broader financial markets rout, as investors price-in weaker external conditions, according to the report.

The company believes that a late-stage economic expansion, waning fiscal stimulus in the US, elevated US-China trade tensions, a strong dollar, high EM corporate debt loads and quantitative tapering are all rattling the markets and spilling over into concerns over the demand for oil.

“More broadly, the appetite for risk is low and money managers are rotating out

of riskier assets, like commodities, and into safe havens and cash. The threat of recession is at the front of investors’ minds and the question has become ‘when’ and not ‘if’.”

Fitch Solutions forecasts that in the near term, price action will largely be dictated by the outcome of the OPEC meeting in December.

“Our core view is that the group will opt for a ‘soft’ cut – that is , they will rollover the existing cut deal and increase target compliance from 100 percent currently. Given that the group has signaled a cut is on the table and in light of how low prices have sunk, inaction would likely trigger renewed selling pressure. There are numerous risks to this view. Compliance with the deal is highly varied and there are signs that some cohesion is being lost.”

The Declaration of Cooperation constitutes an unprecedented milestone in the history of the Organization of the Petroleum Exporting Countries (OPEC). For the first time ever, the Member Countries of OPEC coordinated with 11 non-OPEC oil producing countries in a concerted effort to accelerate the stabilization of the global oil market through voluntary production adjustments, which amounted to approximately 1.8 million barrels per day.

The Declaration was an outcome of the Joint OPEC-Non-OPEC Producing Countries’ Ministerial Meeting held on 10 December 2016 and was effective for an initial period of six months. The Second Joint OPEC-Non-OPEC Producing Countries’ Ministerial Meeting, held on 25 May 2017, decided to extend the voluntary production adjustments for another nine months commencing 1 July 2017. At the third joint OPEC-Non-OPEC Producing Countries’ Ministerial Meeting, held on 30 November 2017, it was agreed to amend the Declaration of Cooperation so that it will take effect for the entirety of 2018.

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Follow the author on Twitter: @Lyaman_Zeyn

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