Bear market deepens for oil amid global recession fears
The oil markets have been well and truly scared into submission by the bearish growls coming from supply and demand fundamentals, particularly on concerns over a slowdown in global demand as fears rise over economic downturns in China and the US.
As of December 18, WTI spot crude benchmarks have slumped well below $50 per barrel at $47.8. Brent crude fell to $57.6 per barrel - defying Opec's supply cut intervention - with investors focusing instead on oil glut and recession fears.
Indeed, WTI crude spot prices have been in a bear market as of November 9 when they fell by 20 per cent. Ongoing warnings that the global economy is at risk of slowing down in 2019 is the major catalyst behind the price action.
Investors are hyper-aware of two things; the heightened risk of a glut returning to the oil markets amid record US shale production; and slowing growth in China which is expected to decrease demand for oil from Asia.
Adding to demand-side weaknesses, global orders from Asia may be lower than expected given China's third quarter slowdown in the wake of trade frictions with the US. Global orders are also likely to be at risk to a lower revision as more indications come through that economic output is dipping lower in Europe, while the same momentum is being noted across different emerging markets in various regions.
What needs to be considered by investors is that - like all commodities - oil relies on demand, and if there is anxiety over a potential slowdown in global economic momentum, then it is only natural that concerns will be raised over a likely drop in demand for oil.
The bearish conditions in the Asian stock markets aren't helping either. Already, China's stock exchanges have lost an estimated $2 trillion in value for the year, with the manufacturing sector particularly hard hit, meaning gloomier prospects for fuel used in factory processes.
Stock sell-offs appear to indicate reduced investor confidence and a negative risk mood. Initially, high oil prices were seen as hurting corporate profits, lowering dividend payouts and making other investments more attractive. Current lower prices - and the reasons behind the slump in demand for oil - are chipping away even further at investor confidence.
Looking ahead, the subsiding trend in oil prices may continue, barring unexpected market or geopolitical events. Opec's supply cut strategy is still in place but seen as weakened by high US shale production levels.
US output is reaching record levels, with the International Energy Agency estimating it may rise to 8.166 million barrels per day by January 2019, adding to the chances a glut may dominate in the first quarter of 2019.
It's true oil prices have fallen, and at the same time, the oil markets have become more concerned about the ongoing external uncertainties that are impacting the global economy.
The Opec may need to take stronger measures to meet the challenge from US shale and its growing market share. In the case that China's economic growth slows down even further, Opec's supply cut tools would become even more important to support oil prices and prevent them from returning to the lows seen in 2015 and 2016.
The writer is global head of currency strategy and market research at FXTM. Views expressed are his own and do not reflect the newspaper's policy.