In what has been the most precipitous drop the commodity has seen since July/August of 2015, futures contracts for both Brent crude and the US-benchmarked WTI crude oil are back down to trading below 52-week lows. After falling more than 30 percent in less than two months, investors are looking for any signal as to whether this might be the bottom for oil, or if the market is in store for further shocks.
Not content to leave the speculation up to speculators, Goldman Sachs Group Inc. (NYSE: GS) on Monday signaled a bullish case for oil in 2019, pointing to sustained fundamental support to boost energy back above 2018’s lows. To follow that up, the bank’s global head of commodities research Jeff Currie appeared on CNBC to call the recent sell-off a “dislocation,” one driven largely by an overreaction to waivers from the US’s Iranian oil sanction.
Among the catalysts for a rebound, Goldman Sachs cites the upcoming G20 and OPEC meetings as providing some support to the tumbling market. In the case of the former, they hope to see the US repair some of its damaged trade relationships, especially with China, while the latter they expect to provide some elucidation to the member nations’ planned production cuts. Beyond that, Goldman anticipates sustained global demand propping prices back up to prior levels.
However, if recent history is any guide, those immediate hopes might be a little lofty. In the case of the G20 summit, President Trump has not necessarily played nice with world leaders at previous conventions, and there’s little indication that trade talks have progressed much since the summer.
As for December’s OPEC meeting and its efforts to curb production, the organization (along with non-member Russia) are still currently under cuts that took effect in mid-2017 to combat a massive glut in the market. Recall, Brent crude spent the better part of the past three years below $60. While it’s upward climb in that span suggests some efficacy to the cuts, the surge it saw in mid-2018 wasn’t built on them. The International Energy Agency saw record output from Saudi Arabia, Russia and the US.
What drove oil prices in 2018 to multi-year highs was record demand. That same IEA report put Q3 global demand at near 100 million barrels a day. But the demand picture is looking less certain going into 2019.
Strained global trade is obviously one element, as is the EIA’s declining estimate on 2019 demand from developed nations like the US, Canada, Japan and most of Europe. Adding to the diminished outlooks are flagging prices in other growth markets like metals and equities, which are all down over the past six months. And, despite the optimism that stocks have shown through the year, global economies from the U.S. to India to Japan have spent the bulk of 2018 gradually tightening their economic policies.
However, that’s not to say demand is going to tank in 2019 because developed nations might be drawing back next year, just that a bull market in oil is less certain that the commodity finding an equilibrium.
But, if crude is going to rally, it might be best to look to emerging markets in Africa and Southeast Asia to do much of the heavy buying. The IEA’s report lowered its estimate on demand among these economies, however, that was when Brent and WTI were both near multi-year highs. A key factor in whether that lowered estimate holds is the USD, the strength of which has put massive price pressures on less affluent countries. What’s more, the corollary effect of falling dollar is increased oil prices.
While Goldman’s case for oil could hold true if demand does persist and the OPEC cuts are followed by the member nations, the real test for crude in 2019 will be whether growth outweighs inflation around the world.
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