Oil Demand to Remain Subdued Due to Trade War Concerns

Published July 22nd, 2019 - 05:12 GMT
Global demand growth of 0.93 million barrels a day year-on-year in 2019 and 1 million barrels a day during 2020
Global demand growth of 0.93 million barrels a day year-on-year in 2019 and 1 million barrels a day during 2020. (Shutterstock)
Highlights
According to Bank of America-Merrill Lynch forecast, the market should keep Brent and WTI prices at around $63 and $55.5 per barrel for the second half of the year.

Oil prices will remain subdued amidst bearish grip in the second-half of 2019 as well as in 2020 due to low demand and trade war concerns as investors moved heavily back into speculative positions, analysts said.

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According to Bank of America-Merrill Lynch forecast, the market should keep Brent and WTI prices at around $63 and $55.5 per barrel for the second half of the year. It projects Brent and WTI to average $65 and $56 per barrel respectively in 2019, and $60 and $54 a barrel in 2020.

"Our supply and demand forecasts suggest a 100,000 barrels per day deficit in 2019 and a 370,000 barrels per day surplus in 2020," it said.

It forecast global demand growth of 0.93 million barrels a day year-on-year in 2019 and 1 million barrels a day during 2020.

For Iranian oil production, BofAM sees output will fall to 1.9 million barrels per day in H2 2019 from 3.6 million barrels a day in third quarter of 2018 as US sanctions waivers expire in second quarter of 2019.

"While global cyclical demand conditions are poor, high compliance rates with IMO2020 rules could result in a big fuel consumption boost. On the other hand, the upcoming over two million barrels per day surge in oil pipeline capacity out of the Permian could offset a likely bounce in oil prices in Q4 2019, if producers can fill them. In sum, beyond the politics, two main open questions for oil in Q4 19 are IMO2020 compliance rates and Permian pipeline fill rates," Bank of America Merrill Lynch analysts said.

Last week, oil weakened considerably despite an escalation of geopolitical tension toward the end of trading. Brent futures closed down 6.4 per cent over the week at $62.47 a barrel while WTI lost 7.6 per cent to close the week at $55.63 a barrel.

The seizure of UK oil tankers and destruction of an Iranian drone have again raised concerns over the security of supply coming out of the Strait of Hormuz and helped prices stem losses somewhat on Friday.

The market expectation of the US Federal Reserve cutting rates later this month is also weighing on the dollar, easing one additional headwind for crude and commodity prices.

"Investors moved heavily back into speculative positions in both Brent and WTI, adding sizeable new long positions. We still wouldn't rule out a disorderly exit out of Brent should forward curves weaken even more or weak demand considerations overwhelm supply risks over the next few months," said Edward Bell, commodities analyst at Emirates NBD.

Naeem Aslam, chief market analyst at TF Global Markets, said looking at the speculative market, it is evidently clear the hedge funds are no longer interested in opening any new long oil positions.

He noted that long speculative positions on oil have fallen to their lowest level since 2013.

"To conclude, the bearish grip is still too strong and there is too much pressure on oil producers to keep the supply in check and the demand equation isn't showing any sign of recovery due the ongoing trade war between the US and China. I believe that the current mean reversion trade may not last for long unless of course, the geopolitical tensions in the Middle East shifts its gear or by any miracle, Donald Trump makes peace with China," Aslam said.

"The near term support for WTI is near $50 (for now) and a break of this may open the door for the price to move towards a major support area of $45. The near term resistance for Brent is at $62 followed by the level of $65," he added.


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