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On Tuesday, oil prices plummeted by nearly 8%, hitting a new low since 2018. The US WTI crude oil futures price fell 40% from the nearly $80 high hit in October.
WTI Daily Chart, market source: Yingwei Financial Information Investing.com
This round of plunge reflects the following problems that continue to exist in the oil market:
1. Data shows that the US crude oil production has increased significantly
US Energy Information Administration (EIA) Recent data released by the United States shows that in recent months, the growth rate of US crude oil production has even exceeded previous expectations. In fact, the United States has actually become a net exporter of crude and petroleum products in the last week of November.
In addition, the latest monthly report of the American Petroleum Association (API) shows that the average daily crude oil production in November reached 11.6 million barrels, making the United States the world's largest oil producer. Data released by the American Petroleum Association for the second week of December also showed that U.S. crude oil inventories increased significantly, which pushed oil prices to a certain extent. Meanwhile, although the U.S. Energy Information Administration weekly report shows that U.S. crude oil inventories have increased slightly, the amount of less than 500,000 barrels is unlikely to boost oil prices from the current lows.
analysts believe that although the US WTI crude oil price hovers at a low of $40 to $50, the output growth in the US shale oil region is still unstoppable and the momentum will continue until 2019. While low oil prices are not good news for U.S. oil producers, if these producers hedge wisely in September, the impact of low oil prices can be controlled. In addition, infrastructure plans developed by these manufacturers have started and can continue to receive investment and loans.
Many analysts are also paying attention to the number of oil wells that have been drilled but not yet completed. These wells can start crude oil production at the lowest cost and in the shortest time, which does reflect untapped oil production potential. However, it is not easy to accurately quantify the output that these wells can actually provide in 2019.
Although the growth rate of US shale oil production in 2019 is expected to be very strong, it should be noted that the actual growth rate is restricted by conditions , which cannot be fully functional as expected, especially if US WTI crude oil continues to fall below the $55/barrel level in the next few months.
2. OPEC and Russia have produced insignificant production cuts
Russia and OPEC did announce in early December that it would significantly cut 1.2 million barrels of daily production, but this production cut is not enough to balance market supply and demand. The production cut will start in January, based on production from OPEC and Russia in October. In other words, Saudi Arabia's will cut 400,000 barrels of daily production, while Russia cuts about 228,000 barrels of daily production. These data explain why oil prices continue to fall: Despite OPEC and Russia's announcement of production cuts, U.S. Energy Information Administration data shows that U.S. crude oil production increased by 1 million barrels between June and November, far exceeding Saudi Arabia and Russia's cuts.
3. Demand, emerging markets are the key
All forecasts for 2019 show that the growth rate of global crude oil demand will slow down. The degree of slowdown in demand growth is likely to depend on the degree of slowdown in global economic growth in 2019.
Despite the decline in U.S. stock markets, economic activity remains strong, a good indicator of economic growth, a good indicator of aircraft fuel demand remains strong and growing.
However, the focus of 2019 is whether economic growth in emerging markets will slow down. However, oil prices between $40 and $50 may help stimulate economic growth, especially in emerging markets.
Interpretation Saudi Arab 2019 budget and oil policy
Saudi Arabia announced its 2019 budget earlier this week. This includes a 7% increase in spending, with total spending reaching US$295 billion, a record high in Saudi Arabia's budget.
Financial institution Al Rajhi Capital estimates that according to this budget, if Saudi Arabia wants to maintain a break-even fiscal balance, it needs to sell oil at a price of $84 per barrel, while Bloomberg's estimate even reaches $95 per barrel.Given the current oil price trend, many analysts expect Saudi Arabia to take action to push up oil prices in 2019 to balance the budget.
However, investors do not have to take these analyses seriously. Saudi Arabia's expected deficit accounts for only about 4.6% of its GDP. For countries like Saudi Arabia, it is completely reasonable to maintain this level of deficit rather than mandatory revenue and reduction.
Saudi Arabia has huge foreign exchange reserves, which can be used if necessary, and it is still able to borrow money. It would be a big mistake to think that Saudi Arabia will actively push oil prices to rise in the short term based on this budget. This Middle East country is not in a hurry to balance its budget.
[This article comes from Yingwei Financial Information Investing.com, follow WX: Yingwei Financial Information Investing. For more information, please log in to cn.Investing.com or download Yingwei Financial Information App]
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