Oil Producers Set to Sink, Here’s Why

Overnight, US markets were belted with the S&P 500 slipping 3.3%, its biggest fall since 8 February 2018. The Dow Jones Industrial Average also copped a beating, losing 3.1%, also its biggest fall since 8 February 2018. There is a sense of frustration this morning as there is little agreement as to what comes next.

What we can expect, however, is Australian oil producers to take a hit this morning. The WTI crude oil price fell 2.8% to US$72.83 a barrel and the Brent crude oil price tumbled 2.7% to US$82.73 a barrel.

What’s caused the sinking oil price?

The US Energy Information Administration raised its 2018 and 2019 price forecast overnight. The EIA issued a forecast of US$68.46 a barrel for West Texas Intermediate, up 2.1% from the forecast issued in September. It also hiked the price for 2019 to US$69.56, up 3.3%.

For Brent crude the EIA moved the price up to US$74.43 a barrel, up 2.2%. The 2019 price is now forecast to be 1.9% higher at US$75.06.

While we’ve seen oil prices decline in line with big drops on Wall Street overnight, the drop is likely due to a third consecutive rise in US oil inventories.

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Both Russia and Saudi Arabia have been ramping up oil production to cool rising oil prices. US oil producers seem to be following suit. The EIA increased the domestic crude output forecast by 0.8% to 10.74 million barrels a day this year, and lifted the 2019 view by 2.2% to 11.76 million barrels a day.

Oil prices may remain under pressure for some time as analysts anticipate that major organisations might downgrade their expectations of global oil consumption, after the IMF lowered its projections of global economic growth for 2018 and 2019.

It is likely that the current over supply of oil in the US and the continuing increase of oil production elsewhere in the world could see oil prices continue to slide.

What’s next for oil and Australian producers?

Some major traders are tipping crude oil to reach a US$100 a barrel by the end of this year. This seems unlikely now with EIA expectations sitting comfortably below this figure.

WTI and Brent crude could continue to slip downwards as the market corrects itself to meet EIA expectations. Currently, both WTI and Brent crude are still selling above EIA forecasts, with still some ways to fall before prices match these predictions.

With the current fall in risk appetite thanks to record long-term interest rates for US Treasury Bonds it’s not clear where hedge funds and other money managers will be placing their bets.

Australian oil producers will likely feel the squeeze today. With US oil stockpiles already above predicted levels, demand is expected to fall.

At the time of writing Beach Energy Ltd [ASX:BPT] is down 5.30% to $1.875, Santos Ltd [ASX:STO] is down 4.00% to $7.08, SOUTH32 Ltd [ASX:S32] has fallen 3.52% to $1.23, and Woodside Petroleum Ltd [ASX:WPL] has slipped by 2.52% to $37.07.

Regards,

Ryan Clarkson-Ledward,

For Money Morning

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Ryan Clarkson-Ledward is one of Money Morning’s junior analysts. Ryan holds degrees in both communication and international business. He helps bring Money Morning readers the latest market updates, both locally and abroad. Ryan tackles all the issues investors need to know about that the mainstream media neglects. Ryan’s primary focus is assisting Sam Volkering with background research and insight for readers by dissecting the latest events affecting the world. Working closely with Sam, they explore the latest in small-cap and technology stocks as well as cryptocurrency opportunities. You can find Ryan’s contributing research, developments, and supporting information across several e-letters, including:


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