Why crude oil has entered uncharted territory?

The crude-oil market has turned quite uncertain and vulnerable. On the one hand, OPEC is committed to tightening the crude oil market. US President Donald Trump's unpredictable behaviour and ambivalent attitude, however, have led to sharp volatility in crude-oil prices. With his latest action, crude oil has entered uncharted territory.

The Trump administration recently announced that it would not renew the exemption granted last year to buyers of Iranian oil. Earlier, expectations were that the US would extend the waivers. Trump wants to bring down Iran's crude-oil exports to zero. As a result, crude-oil prices have been rising sharply.

However, Trump has now asked OPEC to raise crude-oil production in order to bring prices down. With the recent Trump googly, the crude-oil market has been plunged into a dicey situation. On the one hand, Trump is eager to cut out Iran's crude-oil production from the global oil market. Simultaneously, since the US presidential election is scheduled next year, Trump wants lower crude-oil prices in order to maintain his popularity.

Saudi Arabia has signaled that it is determined to do whatever it takes to rebalance the market. It has cut production by more than it agreed to under the pact. According to the IEA, OPEC's compliance jumped from 94 percent in February to 153 percent in March. Venezuela's crude-oil production continues to fall due to US sanctions and a string of blackouts.

The IEA put Venezuela's crude-oil output as having fallen to 870,000 b/d. The US may impose additional sanctions in the future. The Trump administration has been pressurizing India and China to cut out oil purchases from both Iran and Venezuela. Hence, the situation in Venezuela is becoming even more difficult.

Renewed militant activity in Libya is a matter of concern for the market. Escalating tension might have an impact on crude-oil production. The situation is much worse than it was in 2011 during the civil war. Fears of a global economic slowdown persist.

The European countries' manufacturing PMI is declining sharply. In the US, the Treasury yield curve inverted in March, for the first time since 2007. This indicates an imminent threat of a recession. The US and China have shown tremendous progress in trade talks. However, given the nature of Trump, there are doubts about the sustainability of the deal, if it comes through.

The market expects OPEC to extend its production-cut deal till this year-end. OPEC's bi-annual meeting is scheduled for 25-26th June, at which it may decide to extend the deal or not. Since January, OPEC and its allies have been cutting production (by 1.2 million b/d) for six months to tighten the market.

The EIA has raised its Brent crude-oil price forecast for 2019 to $65 a barrel, up from its earlier projected $63 due to the tighter global oil market. Overall, much uncertainty prevails in the market. Hence crude oil is likely to be volatile in coming sessions

 

 

Source:- Money Control