Crude Oil Outlook July 2019

Brent Crude

Brent crude oil prices stabilized in recent weeks after falling sharply in May and the first days of June on the back of fears of a global slowdown and escalating trade tension between China and the United States. On 5 July, oil prices traded at USD 64.2 per barrel, which was 3.3% higher than on the same day last month. Moreover, the benchmark price for global crude oil was 16.7% lower than on the same day last year, although it was up 27.0% on a year-to-date basis. Oil prices were influenced by diverging forces in recent weeks. Uncertainty about the health of the global economy and the trade spat between the two superpowers sparked concerns about a fall in demand for the black gold. Moreover, the U.S. continued to post new oil production highs thanks to its booming shale industry. On the other hand, oil production cuts by OPEC+, falling production in Venezuela, fears of supply disruptions in Libya and Nigeria, and U.S. sanctions against Iran’s oil industry threatened to tighten global oil supply. Looking forward, the decision by OPEC+ to extend oil production cuts until end-March 2020 is expected to support oil prices, as should a better relationship between China and the United States following the meeting between Presidents Donald Trump and Xi Jinping at the 28–29 June G20 summit. Oil prices could get another boost from escalating geopolitical tensions in the Strait of Hormuz, as relations between Iran and the United States deteriorate further. Nevertheless, subdued global growth and strong production in the U.S. will limit the gains. FocusEconomics panelists see prices averaging USD 67.7 per barrel in Q4 2019 and USD 66.2 per barrel in Q4 2020. In light of recent developments, 21 panelists left their forecasts unchanged for Q4 2019 from last month, 4 upgraded their projections, while 14 cut their projections. Diverging forces in the oil market are fueling uncertainty regarding the evolution of oil prices: The panelist forecast range for Q4 2019 spans from a minimum of USD 59.9 per barrel to a maximum of USD 80.0 per barrel.

WTI Oil

In recent weeks, West Texas Intermediate (WTI) crude oil prices recovered some of the losses recorded in May. WTI crude oil prices traded at USD 57.1 per barrel on 5 July, which was up 10.6% from the same day last month. While the price was down 21.9% from the same day last year, it was 26.4% higher on a year-to-date basis. The recovery in WTI crude oil prices mostly reflects increasing fears of a military confrontation between Iran and the United States in the Persian Gulf, especially after Iran shot down a U.S. drone above the Strait of Hormuz on 20 June. A military conflict in the region could disrupt global oil supply as the strait makes up about one-third of total global seaborne traded oil. Oil prices were also supported by expectations that the U.S. Federal Reserve could cut interest rates in order to rekindle economic growth. That said, the U.S. is currently pumping oil at a pace of above 12 million barrels per day, the highest in the country’s history, which limits any significant upswing in oil prices. Moreover, oil inventories in the United States are falling less than what market analysts had expected, suggesting that underlying demand for the black gold is relatively low. The EIA reported that inventories fell by 1.1 million barrels for the week ending 28 June, while markets had previously expected a drop of 3.7 million barrels. WTI oil prices are expected to rise, mostly on the back of the extension of the oil cut deal by OPEC+, supply concerns in some countries and an improved relationship between China and the United States. For Q4 2019, analysts expect prices to average USD 60.5 per barrel, before declining slightly in Q4 2020 to USD 59.5 per barrel. In response to recent developments, 4 upwardly adjusted their Q4 2019 forecasts compared to last month. Meanwhile, 12 panelists kept their projections unchanged and 14 cut their forecasts. Given current uncertainty, the spread between the minimum and the maximum oil price forecasts remains relatively wide: For Q4 2019, the maximum price forecast is USD 73.0 per barrel, while the minimum is USD 53.0 per barrel.