Crude oil prices have overshot to the downside: Paul Hickin of Platts

It is almost as if the oil market is waiting for a catalyst to trigger a rebound

Brent crude may have crashed through the $60/barrel mark Friday as the market's bearish mood continued to gather momentum but one has to remember that this was in holiday-thinned trade with low liquidity amplifying the slide. That was amid expectations of oversupply as talk turned to whether OPEC and Russia can bring production levels down quickly enough in the months ahead.

The oil market has been in a tailspin since October 3 when it peaked above $86/b, dizzy on a concoction of US, Saudi Arabia and Russia record production. In recent days, bears have been focusing on the regular tweets from US President Donald Trump pressurising OPEC to drive prices lower and thanking the kingdom for its contribution in ramping up output.

However, Brent crude will recover to average above $75/b next year despite clouds looming over global demand as OPEC and its producer allies move to defend prices by preventing a new supply glut, according to top banks and oil brokers surveyed by S&P Global Platts.

Front-month spot Brent will average $75.50/b in 2019, down from forecasts of $78.51/b in early October, according to a survey of 11 top oil forecasters. Brent prices this year are expected to average $73.91/b, compared with $73.26/b so far and down from last month's $74.40/b survey result.

But why have the pices slipped?

Oil prices have slumped over 25% since hitting near four-year highs of $86/b, after a series of factors weakened the market outlook. US shale output has beaten expectations, Saudi and Russian exports have surged with production at record highs and the US approved sanctions waivers for eight buyers of Iranian oil.

Elsewhere, Libya and Iraq have continued to pump more oil than widely expected and Venezuela's oil industry has not imploded as some market watchers feared.

While Venezuela's crude supplies have fallen by more than 1 million barrels/day since 2016, recent data suggest production is flattening out. The IEA estimates that Venezuelan output has been in the range 1.25-1.30 million barrels/day for the past five months.

On the demand side, oil markets are concerned about demand growth slipping, particularly outside the US, in part due to the recent run-up in oil prices.

The road ahead

With OPEC and its key producer allies set to consider resuming output cuts to tighten the market at their meeting on December in Vienna, most market watchers believe prices are set to recover from current levels next year.

OPEC appears determined not to let the market slip back into oversupply in 2019 even though the US administration has made its voice heard that it wants lower oil prices.

An OPEC/non-OPEC monitoring committee co-chaired by Saudi energy minister Khalid al-Falih on November 11 strongly hinted that the coalition would consider production cuts of up to 1.4 million b/d to shore up what many analysts forecast as a tepid market ahead. But that was before Trump voiced his political support for Saudi Arabia, repeatedly calling out the kingdom to keep oil prices low.

Following strong signaling from OPEC's key players, many market watchers expect a minimum cut of at least 1 million b/d to be formalised at the December 6 meeting and it’s almost as if the oil market is waiting for a catalyst to trigger a rebound.

Through the current volatility, many market watchers think current prices have overshot to the downside after overreacting to the upside amid Iran supply fears and talk of $100 oil and that the reality is somewhere between the two.

One should also note that in addition to OPEC's expected cut next month, US Iran sanctions waivers are only for 180 days and will be readjusted by early May.

On the demand side, the question remains as to whether concerns over the health of the global economy due to the US trade wars are overdone.

All in all, like I called for a sense of perspective when oil prices hurtled above $80 a barrel, the same sense of perspective is needed here.

The writer is associate director at S&P Global Platts. He tweets @GramscianPaul