Global oil prices climbed 35% in the first four months of 2019 as major producers reined in output and countries from Iran to Venezuela suffered involuntary cutbacks in supply.
Yet crude has since dropped more than 10% amid concerns that demand will ebb. The main culprits: Rising shale production, a slowing global economy and the prospect of a deepening trade war between US and China.
The International Monetary Fund has cut its forecast for economic growth in China – the engine of demand for commodities – to 6% next year, the lowest since 1990 and less than half the peak of 14.2% in 2007.
A global recession could start within nine months if US President Donald Trump imposes 25% tariffs on an additional $300bn of Chinese exports and Beijing retaliates, according to Morgan Stanley. JPMorgan Chase & Co has said the probability of a US recession in the second half of this year had risen to 40% from 25% a month ago.
A full-blown tariff conflict could cut about $600bn off global growth by 2021, according to Bloomberg Economics.
The shale boom keeps booming. US supplies will dominate oil markets for years to come, satisfying 80% of global demand growth to 2020, according to the International Energy Agency. Production from the prolific Permian Basin will double over the period and the country’s total liquid hydrocarbon output will rise to 17mn bpd from 13.2mn in 2017.
Russia now has voiced concerns that falling oil demand could send prices below $40 a barrel. “Today there are big risks of oversupply,” Energy Minister Alexander Novak said in Moscow this week.
There’s now an emerging threat: The prospect of a widespread retreat from funding by multilateral lenders and sovereign wealth funds amid rising global concerns over climate change.
Norway’s SWF has said it plans to drop oil and gas stocks from its $1tn fund to cut its exposure to the sector. The World Bank said in December 2017 it will cease to finance upstream projects after 2019 to bring its lending in line with the Paris climate agreement goals.
Here’s the flip side of the Catch-22 situation.
Closer to 2023, global markets will start to tighten and the IEA has warned that more investment is needed to meet growth in consumption and to make up for production lost to natural declines. By 2023 the level of spare production capacity that could be used in the event of a disruption will be the lowest since 2007. The increasing risk: Prices will become more volatile.
Falling prices, for sure, aren’t a single-edged sword. Cheap oil can cut investments to develop new oil and gas fields. Through 2050, the value of potentially uneconomic projects by private oil companies would reach a mind-boggling $21tn, according to a 2014 report by the Carbon Tracker Initiative.
True, few analysts realistically would expect oil prices to return to the sustainable $100-plus levels in the near future. But oil companies say global energy future envisages rising demand and population growth, making crude an important fuel for decades to come.
The world is in need of a stable oil market with price equilibrium.
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