Written By: Gary Ashton Crude Oil
took a big hit last Friday, ending the day down 4.63% in holiday-thinned trading after Russia’s Energy Minister Novak seemed to indicate Russia may be having second thoughts about extending its cooperation with OPEC to make cuts in global oil production. Novak allegedly said he preferred to wait until 2Q20 instead of the December 6th OPEC+ meeting to address the issue of extending or deepening Russia’s oil production cuts.Novak’s remarks came at the same time Saudi Arabia expressed frustration with production quota busting by other OPEC members and Russia at the expense of the Kingdom. Press articles circulating last week indicated perhaps they have had enough and could ramp up their oil production to permitted quota levels. Saudi has tended to offset OPEC cheating by cutting its oil output more than agreed. Rising supply from Saudi would be a decidedly bearish signal for the oil market.
Rising Supply and Stagnant Demand in 2020
The US Energy Information Agency (EIA) published a chart in their November Short-Term Energy Outlook that shows world liquid fuels production outstripping world consumption by as much as 1.0 million barrels per day by 2Q20, leading to an accelerated build in oil inventory that could put downward pressure on prices.
The International Energy Agency (IEA) says in their November report
that “…the health of the global economy remains uncertain in spite of recent positive news about the US-China trade dispute. This year (2019), we are seeing a big difference in demand growth in the two biggest oil markets.” They go on to predict that Chinese oil demand will slow in 2020 to 375,000 barrels per day (bpd) from 600,000 bpd.The mix of rising supply and falling demand, especially from a high oil-consuming economy like China could spell trouble for the oil market and push prices lower in 2020.
Energy ETFs Give Back 2019 Gains
Energy-related ETFs like the Energy Select Sector SPDR ETF (AMEX: XLE
) started off the year on a high note, rallying back nearly 20% by April from a late 2018 selloff, but have been unable to retain these gains. Every subsequent rally this year results in lower price highs, and each move down tends to plumb new lows. XLE found some price support around $56 per share when tested in August and October this year but could break through that level if the excess supply concerns outlined in this article come to pass next year.