Oil: oversupply concerns

energy sectorAn oil drilling

Carsten Menke (Julius Baer) | While the extension of oil production cuts was confirmed at the last OPEC meeting, discord emerged between Saudi Arabia and Russia about whether even deeper production cuts would be needed. Oil prices came under pressure, reflecting renewed concerns about global growth. We see prices trading slightly below fundamentally justified levels.

After President Putin announced the extension of oil production cuts until March 2020 at last week’s G20 summit, it seemed as if Russia and Saudi Arabia were on the same page in terms of oil policies. Although the extension was confirmed at the meeting of the Organisation of Petroleum Exporting Countries (OPEC), discord emerged.

Saudi Arabia called for even stronger production cuts to bring down global oil inventories and lift prices, which Russia did not agree with. The extension of production cuts means that Russia and OPEC will surrender more market share to US shale producers as the oil market overall continues to grow. Saudi Arabia’s call looks like it has reinforced concerns about falling oil demand against the backdrop of softening global growth, pushing oil prices down by more than 4% yesterday. Oil demand looks soft indeed, and consumption levels are at or below year-ago levels across most key markets.

Yet, we have not seen major shifts in the supply and demand balance in recent months, suggesting that swings in market sentiment have been the primary driver of prices. We maintain our Neutral view on oil and see prices trading slightly below fundamentally justified levels. The bigger picture remains unchanged, as oil remains caught in a range defined by fuel inflation concerns on the upside and shale-oil production costs on the downside.