Crude oil to be quite volatile ahead of OPEC meeting
WTI crude oil prices are down nearly 24 percent since the last week of April. The shocking downturn came at a time when everyone was expecting Brent to move to $90 as the US ended Iran sanction waivers. The escalating trade dispute between the US and China has wreaked havoc on crude oil. Negotiations between the two countries went haywire with the increase of tariffs on $200 billion worth of Chinese goods exported to the US. A ban on American companies doing business with Chinese telecom giant Huawei has further complicated matters.
Adding to this, US president Donald Trump said that tariffs on China could be raised by another $300 billion, if necessary. Trump is also planning to impose 5 percent tariff on Mexican goods from June 10. The US will gradually increase that amount to 25 percent from October 1 until Mexico substantially stops illegal immigrants to the US. The continued trade tension could have a damaging impact on the global economy. The IMF chief has warned that the US and China trade war could cut global GDP by 0.5 percent or about $455 billion in 2020. The IEA has cut its oil demand growth estimate for 2019 by 90,000 bpd to 1.3 million bpd. Hence, the demand concerns have pushed the crude oil prices sharply lower.
On the other hand, the US crude oil production continues to make a record high. According to the EIA, the US crude oil output averaged 12.4 million bpd for the week that ended on May 31, up by 1.6 million bpd in the corresponding period in 2018. The EIA forecasts that US output could rise to 13.38 million bpd in 2020. Crude oil inventories also continued to increase sharply in recent weeks. For the week that ended on May 31, US commercial crude oil inventories increased by 6.8 million barrels after having fallen by 282,000 barrels in the previous week.
The focus will now shift to the OPEC bi-annual meeting in Vienna on June 25. There were expectations that the OPEC might extend the production cut till end of the year. The current production cut deal expires in June. Saudi Arabia has also assured markets that it, along with its allies, would continue to work towards oil market stability. This has supported the crude oil. However, Russian President Vladimir Putin has recently said that Russia does not need higher crude oil prices and it was quite satisfied with Brent at $60-65 per barrel. Hence, there is lot of uncertainty in the market at present. As a result, the focus will shift to the OPEC meeting in Vienna, and it will give direction to crude oil. So, crude oil is expected to experience sharp volatility in coming sessions.