With experts predicting a slowdown in the global economy and a supply glut already forecasted, oil prices face continued downward pressure.
Oil prices have gone through one of the most volatile cycles in recent months. They had reached a 4-year peak in October and have already fallen by 40% from that level so far, now expected to post the largest quarterly decline since December 2014. On Tuesday, Brent crude dropped by 5.6% before recovering slightly on Wednesday morning by 45 cents to reach US$ 56.71 per barrel.
Even as demand is expected to be subdued, the supply glut is also expected to persist despite production cuts by the OPEC+ countries due to growing reserves in US and Russia. US is experiencing a strong surge in shale gas production, and crude inventories increased by 3.45 billion barrels last week. Stephen Innes, head of trading for Asia Pacific at Oanda Corp. in Singapore, commented, “Commodities are not immune to concerns about the global economic outlook, and this is driving negative sentiment across all asset classes. The toxic combination of oversupply worries and global growth distress should see oil prices languish into the year-end.”
Investors fear oversupply in 2019 due to prospects of slower economic growth and little headway in the US-China trade dispute. In a recent speech marking the 40th anniversary of Deng Xiaoping’s “reform and opening up” policy, Xi proclaimed, “No one is in a position to dictate to the Chinese people what should or should not be done.” This is being viewed as a sign of stalemate in the ongoing resolution process with US President Donald Trump. Responding to a Bank of America Merrill Lynch (BofA-ML) in December, 53% of global fund managers said that they expect global economic growth to weaken over the next 12 months.
A rate hike by the US Fed is also expected, which could increase the turmoil in global markets and slow US growth. Donald Trump has cautioned the Fed against hiking rates, which will have an impact on economic growth. He tweeted on Monday, “It is incredible that with a very strong dollar and virtually no inflation, the outside world blowing up around us, Paris is burning and China way down, the Fed is even considering yet another interest rate hike. Take the Victory!” On Tuesday, he urged the Fed to refrain from a rate hike that would make the market “more illiquid than it already is”.