The price of WTI finally broke $60 on Wednesday after EIA’s weekly report showed a draw of 9.6 million barrels of oil from U.S. stores. Since the API’s estimate on Tuesday had been much smaller—only 2.1 million barrels—the EIA news had not been expected. But is this forward movement sustainable? There are two competing arguments for the future trajectory of oil prices. One says that prices are heading steadily upwards and another says that prices are being pulled downward.
The case for higher oil prices:
Oil demand in the United States and India is strong. Refinery margins in the U.S. are good, gasoline stores are being drawn down which means that as soon as refinery maintenance season is over, refineries will be running at full speed and drawing down U.S. stock piles. American oil exports are also strong and growing, so crude oil should be leaving the U.S. or entering refineries, not going into storage. In India, February data showed increases in both gasoline and diesel consumption.
Oil sanctions on Venezuela and Iran have helped eliminate a significant amount of oil from the market that is not being replaced by OPEC. Saudi Arabia is cutting its production deeply and Iraq, Kazakhstan, Azerbaijan and Russia have all committed to further cuts between now and June.
President Trump’s foreign policy is also likely to push oil prices higher by further eliminating sources of oil. At the end of April, the Trump administration will decide whether to renew the exemptions given to some countries to import Iranian oil. It is expected that even if the Trump administration does not eliminate the exemptions, countries will be further limited in how much Iranian oil they can import. The Trump administration is also looking to tighten the sanctions on Venezuela, especially by curbing the amount of oil that country is sending to India.
Under this theory, even America’s growing oil production won’t be enough to keep oil prices from rising during the spring and summer.
The case for lower oil prices:
American economic data indicates strong demand, but European and Chinese economic data tells a different story. European oil demand usually remains steady, but recent data indicate that demand across Europe is actually falling. Significant declines have been observed in Germany and France, with smaller declines in the U.K., Italy and the Netherlands. The data from December 2018 revealed a 755,000 barrel per day drop in demand across Europe.
Chinese demand for oil is another source of concern. Accurate data from China is difficult to come by, but one of the most-watched economic indicators there is factory activity. In February, China’s factory activity slowed. That was the third consecutive month of slowing activity. South Korea’s overall exports also decreased in February, indicating that these weaknesses are spreading across the region. Oil markets typically see weak factory activity and weak export data from Asia as a negative sign, and oil prices usually drop in response. If the U.S. and China do not come to a trade agreement soon, China’s economy could further sputter.
Lagging demand essentially cancels out OPEC and its non-OPEC partners’ recommitment to production cuts. With nothing stopping U.S. production, oil markets could easily remain oversupplied for the rest of 2019.
Which will markets choose?