US shale producers are ramping up output to record levels while Opec cuts are losing weight.
The bear market for crude oil appears to be settling in for the short term, with both Brent crude and WTI benchmarks shedding percentage point after percentage point for 7 weeks.
Oil market conditions are once more out of balance, at least from the oil bulls' point of view. On one side of the scale, US shale keeps ramping up production to record levels. On the other side of the scale, Opec supply cuts are losing weight as investors remain skeptical on whether the group can mitigate the resurgent oil glut amid signs the global economy is slowing down again.
As of November 25, crude oil's bull run appears to have rear-ended the decelerating China juggernaut, and has come to a crashing halt. The market has moved rapidly from a peak to reversal to correction to bear territory, giving investors little time to think. Much of the drag effect comes from China's easing on the back of trade tensions with the US and losses in the global stock markets during October and November.
China's manufacturing sector is seeing definite negative effects from higher tariffs, with some large multi-nationals moving part or all of their production to different countries to avoid the trade dispute. In another sign of slackening demand, gasoline orders from China have fallen to a 13-month low, according to a Reuters report.
China's slowdown appears to be behind a wider regional easing, according to third-quarter GDP numbers from 7 Asian nations. Japan's economy contracted, while Thailand, Philippines, Indonesia, Malaysia, China and South Korea reported slower growth. Trimmed GDP in Asia because of trade tension effects has lacerated demand for oil in various manufacturing sectors.
In China, the car industry is sending distress signals after sales dropped 11.7 per cent year on year. More red flags are going up from the electronics industry, which saw smartphone sales fall by 15.2 per cent.
On the surface, the facts point towards lower demand for oil going into the first quarter of 2019. Earlier in the year, bullish bets on oil were backed by stronger global growth but this support was diminished by the US-China trade tensions.
In spite of the bearish short-term outlook for oil, there were 2 brighter spots in the first week of December. The first was the summit between Chinese President Xi and US President Donald Trump which helped resolve trade issues.
The second was Opec's meeting. Opec and allies agreed to cut oil production by 1.2 million barrels per day in the first six months of 2019 to stem crude oil price losses - in the face of President Trump's disapproval of Opec and US shale's record production levels.
While most signals are pointing the way to a persistent bear market, it's wise to remember that the circumstances changed rapidly towards a downside for oil, meaning they could move just as fast towards an upside in the case of China and the US ending their trade dispute and Opec intervening firmly in the direction of production limits.
The writer is chief market strategist at FXTM. Views expressed are his own and do not reflect the newspaper's policy.