When will world oil prices stop plunging? / News / News agency Inforos
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When will world oil prices stop plunging?

The main thing is to fulfill the OPEC+ agreement

When will world oil prices stop plunging?

The decision on the consolidated reduction of oil production by 1.2 million barrels passed by OPEC+ on December 7th, stabilized the world oil market just for a week. Then the collapse phase continued. On December 24th, commodity exchange prices of the Brent benchmark crude approached the level of 50 dollars per barrel, and on December 25th it fell even below.

The rate-sensitive industry was rather half-hearted about back-up information issued by OPEC+ on December 20th (in the first half of 2019, member-states will reduce oil production by 2.65 percent as compared with October 2018, while all the OPEC countries will reduce production by 3 percent) – the bearish tendency only intensified.

Factors in favor of reducing the barrel price can be both fundamental (forecasts for a slowdown in global economic growth and consequently the slumping global oil demand) and monetary. The Federal Reserve System's decision plays an important role: on December 19th, the US regulator raised the benchmark interest rate to 2.25 - 2.5 percent. Also, there was a slight decrease of geopolitical tension in the Middle East – at least US President Donald Trump announced Syria mission windup and US military contingent withdrawal. This rather unexpected turn was another contribution to oil cheapening.

"Oil" Ministers of OPEC+ started explaining the negative trend for oil producers. Thus, Energy Minister of Saudi Arabia Khalid al-Falih considers the surge of oil prices decline a temporary thing. Since the beginning of 2019, the OPEC+ deal settlement has stabilized the market, he told journalists. "We follow the basic trends. I am 100 percent sure that in 2019, we are going to stabilize the market. The decision we made in Vienna was balanced and strong to entail a demand and supply equilibrium. Oil reserves have already started to decline," the minister said.

And Russian Energy Minister Alexander Novak does not consider the year-end plunge of world oil prices as indicative. So far he urged to continue monitoring the oil market situation before taking any decision within the OPEC+. It is important to watch how things develop in January, so right now it would be wrong to make any rash decisions, Mr. Novak said regarding the possibility of convening an extraordinary session of OPEC+ aiming to further reduce production quotas.

The upward correction may follow when the "gentleman's" agreement comes into effect. So far, the countries did not opt for the restraint regime, traders suggest. The process of setting quotas will be very deliberate. Russia, for instance, pledged to reduce daily production by almost 230 thousand barrels during a quarter. Other OPEC+ members will certainly abstain from selflessly introducing the regime of accelerated production cuts as well. In other words, the global oil market will not suffer a sharp drop in crude oil volumes. Neither should we expect a quick recovery of barrel's commodity exchange prices.

Another relevant factor to influence oil commodity exchange prices is the evolution of Iran's proposal. So far, statistics show a serious reduction in oil exports by Tehran. The December report by the International Energy Agency (IEA) gave the reason for such a dramatic situation – US sanctions forced Iran's customers to reduce their purchases. And in November the country's oil output reached its minimum since January 2016, falling to 3.01 million barrels per day, the review clarifies.

Moreover, in the first decade of May US sanctions will be reinstated after the 180-day wind-down period, including those targeting Iran's key oil buyers. But Iran promised to resist the US and respond with blocking the passage of tankers through the Strait of Hormuz. Fearing this kind of scenario America has already sent an aircraft carrier with escort ships to the Persian Gulf zone. So in general, the Iranian factor is an effective geopolitical "kickoff" for bulls.

Forecast for the global oil market remain uncertain. Back in early December, global investment groups were bold in monetary estimates for 2019, varying from 60 to 80 dollars per Brent barrel. Now that the benchmark has fallen below 50 dollars, there is a reason to expect a revision of oil prices' lower bound in January.

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