The beginning of December will be important for the oil markets. Because there will be an Aramco IPO, and also at the end of next week OPEC will meet.
Next December 5th and 6th OPEC will meet with other nations outside the organization led by Russia, in its headquarters in Vienna. At the meeting they will consider whether to continue with the current plan of production cuts of 1.2 million barrels. The current plan runs until March 2020, and the conclusions could be following: they postpone the decision until early next year (likely), they extend the agreement for more months (very likely), they increase or decrease quantity (unlikely).
Far are the days when the price of oil exceeded 100 dollars per barrel. A few years ago, any rumor of a possible meeting of OPEC countries caused the price to move in an excessive way. There was no need for them to speak explicitly of intervention at production levels, the mere fact of thinking it would have put pressure on crude oil prices without hardly changing the fundamentals.
Figure 1: M+1 Brent Quotation, Source: M·Tech
The organization has been losing influence in the markets over time, while other markets have gained strength like fracking industry that has been gaining ground making the United States the largest oil producer in the world. (Above Saudi Arabia and Russia)
The least effect on the cartel’s decisions in the market began with the oil crisis at the end of 2014, after the massive production of shale oil that invaded the supply market. This happened in a scenario of declining demand, during the financial crisis. This fact pushed crude oil prices to cross the barrier of 30 dollars a barrel.
If the price rises or falls this 2020, it is not going to be only because of what the organization decides next week. That the organization does not go through its best moments is not a secret. They have gone from producing 50% of global oil to 30% currently and falling (Recent exit Ecuador and Qatar). No matter how long it continues with its cuts, for the moment, it is not making any effect on the offer.
For its part, Russia has reflected a certain skepticism regarding the prolongation of the deal longer, so it will be difficult to reach an agreement.
A highlight is that Aramco, Saudi Arabia’s state-owned oil company, will offer this month 1.5% of its shares in the largest IPO. And although there is still an interest in the offer because Aramco remains the most profitable company (net profit of half a year of 12%) and the lowest cost products in the world, if it is true that low oil prices do not favor.
Let’s see the fundamentals
Inventory levels in the U.S. have been a relevant driver for price evolution. The graph below shows the evolution of inventories in the United States over the last five years. It can be seen first of all, that this year there are more US inventories than last year. On the other hand, we can see how the trend of the last five years has decreased in the last months of the year. So, if the current trajectory continues, we could see a decrease in stocks compared to last year.
Figure 2: U.S. crude oil inventories. Source U.S. Energy Information Administration
Another factor affecting price in the short to medium term has been the imposition of U.S. sanctions against Iran and Venezuela, which forced OPEC members to drastically reduce oil exports. This has obviously restricted the supply of oil.
In addition, the trade war between the two world economies of the United States and China has slowed growth around the world, as this would entail increased costs for companies importing goods by raising prices for consumers. It seems that they are close to reaching the Phase One agreement, but this has led the market to reduce the forecasts of oil demand.
There is a lot of uncertainty in the oil outlook, but this time there are more doubts on the demand side than on the supply side. Any progress in the negotiations between China and the United States can change growth projections, and even if you have discounted it we could see changes in the demand outlook.
Together with the above, the determining risk factor for the evolution of prices will be the global economic outlook for 2020 that affects demand. Even though the risk of a recession in the global economy by 2020 is low to moderate. So, in the absence of growth and more geopolitical conflicts, we might expect the Brent to continue to trade above these levels where we see markets feeling “comfortable”. This month’s events will be a key factor to confirm this.
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