Crude sentiments have improved and prices are moving up. On Thursday, oil prices were seen hovering near a three-month peak.

Several factors are in play.

The US-Chinese ‘phase 1’ trade agreement has worked. After months of speculation about the depressed state of global economy and consequent feeble demand growth, thaw in trade relations between the two global giants have altered market sentiments.

Global economic prospects and demand outlooks have turned positive, underpinning once again, the importance of China in determining the direction of the crude world.

Crude oil traders have become progressively more bullish about the outlook for prices, as the trade war between United States and China has eased, commented John Kemp writing for Reuters.

Fresh economic data from two of the world’s top oil consumers – US and China – has also been providing a positive direction to oil prices. Production data from some other major global economic powerhouses have also begun showing signs of growth, indicating for the first time in months, that the slowdown in global growth and trade maybe finally bottoming out.

The Energy Information Agency (EIA) is now reporting that US crude inventory fell by 1.1 million barrels in the week to December 13 to 446.8m barrels, indicating a surge in consumption and some expectations of an uptick in demand next year.

Deeper production cuts coming from the Organisation of the Petroleum Exporting Countries (Opec) and its allies led by Russia also offered support to the markets, preventing any further slide. But that was not the major element behind the crude price movement, underlines Kemp.

‘The (Opec) production cuts are a second-order effect. The rise in oil prices has been primarily driven by greater optimism about the outlook for global trade and the economy next year.’

China and India are the major influencers of the oil markets today. As per BP, Chinese oil demand has been growing at an average annual rate of 5.5 per cent, whereas demand in India has been growing by some 5.1pc since 2008.

In sharp contrast, the US oil demand has only been climbing by 0.5pc per annum over the last decade and the consumption growth in OECD has in fact been contracting-albeit slowly-over the years.

With little energy resources of their own, both China and India are overwhelmingly reliant on imported oil, Kemp points out. While the Chinese crude consumption averaged 13.5m bpd in 2018, the percentage of imported oil in its total consumption is almost 70pc. While India is consuming 5.1m bpd of oil, 80pc of its requirements are met by imports.

However, despite the shale revolution and modest domestic demand growth, in absolute terms, the US remains the world’s largest oil consumer, guzzling around 20m bpd of crude.

Markets also keep a close watch on the US data, its crude consumption and imports, week by week. As per the latest EIA report, the US imported 6.9m bpd of oil in the first week of December. This is more than a quarter of the US domestic consumption and also more than India’s total consumption.

Any major movement in the US energy data hence continues to impact the markets significantly.

Kemp argues that the size of the US consumption, hence, makes the EIA’s weekly petroleum status report popular among oil traders and others. Before taking a decision, they need to look at those figures closely. Only last week, after the EIA reported a smaller drawdown in the US inventory, crude markets pared some of its gains.

While some including the IEA still point to a coming glut, JP Morgan and few others have now interestingly begun looking the other way and raising their oil price forecasts for next year. As per JP Morgan’s projections, rather than oversupply, the oil market will be in a deficit next year, by 200,000 bpd.

This is in stark contrast to its estimates from September that assumed a 600,000 bpd oversupply situation for 2020. It expects a 1m bpd global demand growth-the same as its September forecast.

Goldman Sachs has also revised upward its oil price forecast for next year. It is now expecting Brent crude oil to average $63 next year, with WTI averaging $58.50 per barrel, according to its revisions made last week. Yet, others, including the International Energy Agency, are pointing to the coming glut.

The fact is we are living in a seller’s market. Saudi Arabia is no more the swing producer of the world and the Opec is no more in the driving seat. It is the consumers’ who are literally in control of the crude markets.

Published in Dawn, December 22nd, 2019