A FEAR premium has been built into crude prices but are they going to last, and for long remains a big ‘if’. While geopolitics would continue to impact the markets until the Middle East, so important to the ongoing ‘crude game’, settle down, there are now growing signs of unease in the markets.

Initial signs are already on the horizon. Early on Thursday, oil markets extended their losses and were set for the worst in six months. Although the oil futures settled higher Friday, recouping a portion of recent losses, yet prices registered their worst weekly performance of the year. Seemingly trade tensions were enough to dampen the demand outlook.

Leading the market were concerns about the China-US trade conflict which is intensifying fast into a technology cold war between these two largest economies of the world. In the ongoing trade war, no further talks between top officials have been scheduled since the last round ended in a stalemate on May 10. Markets are taking this as an ominous signal.

Markets were also faced with a battering a day earlier when the Energy Information Agency (EIA) had announced that US crude oil inventories rose the week before, hitting the highest level since July 2017. As refineries cut output, the US crude stockpiles rose by 4.7 million barrels in the week that ended May 17, compared with analysts’ expectations for a decrease of 599,000 barrels.

Much thus seems now banking on the state of affairs in the geopolitically strategic Middle East. If there are no further supply disruptions in the Persian Gulf, crude markets are in for some more retreat, analysts are now underlining. But even if there are fireworks in the region and prices go up, that would not last long, a consensus seems emerging.

The growing fear of a trade war on the emerging global crude demand patterns is impinging heavily on the crude markets. Early last week, the International Energy Agency lowered its demand growth projection for 2019 by 90,000 barrels per day (bpd) to 1.3 million bpd. It also revised down its 2018 demand figure by 70,000 bpd to 1.2m bpd.

An interesting scenario is in the making. “Neither renewed Middle East tensions nor possibly extended Opec+ output cuts have managed to bump crude oil from its tight range. The reasons? Growing worries about the impact of the trade war on global economic growth as well as a stubbornly strong dollar” says SaxoBank’s Ole Hansen.

JP Morgan is of the view that the return of the geopolitical risk premium in oil prices could be only for the short term, as US shale production continues to grow, while global oil demand may falter amid uncertainties in the world’s economy.

“It’s difficult to make a case why oil prices materially move up from here,” Scott Darling, head of Asia Pacific oil and gas research at JP Morgan, told the CNBC on Monday, although he admitted that right now it’s okay to consider risks of supply outages, given the current geopolitical situation. US shale has dramatically cut the market cycle for oil, so the geopolitical risks could be short-lived, Darling told CNBC.

US shale operators are on course to increase oil production significantly in 2019. The growth in the US onshore production from the first quarter through the fourth quarter could come in at around 1.1-1.2m bpd, or 16 per cent for the full year, a Rystad Energy report said.

The Bank of America Merrill Lynch while conceding that the new sulphur content regulations for shipping fuels could push Brent to as high as US$90 a barrel but warned that an all-out trade war could send prices plunging to as low as US$50 if it leads to an economic downturn.

Global oil demand may be a bit lower this year than previously thought, weighed down by weaker consumption rates in emerging markets.

This puts Opec+ (Organisation of the Petroleum Exporting Countries and Russia) in a quandary, as they sit down next month to decide on how to proceed with their oil supply management policy. The question is; whether to extend the production cuts in some form or to reverse all or some of the cuts.

The oil market outlook is “quite foggy,” given, the weakening demand picture and threats to supply. The available data is confusing too. Inventories have narrowed sharply, but haven’t moved much in recent months. And in the US, inventories have actually increased. This data clearly worries the producers, who fear another price collapse if they agree to increase production.

The scenario is not far from gloomy. Bets are on.

Published in Dawn, May 26th, 2019