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Oil Price Dips on Supply Glut: Can OPEC Provide an Impetus?

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There is increasing evidence of a fundamental change in the oil market. WTI crude, the American benchmark, popped above $76 a barrel and touched multi-year highs in early October. A looming shortage of the commodity on Iran sanctions helped in driving oil prices higher. Now, in a reversal, oil is facing a two-pronged attack — rising supply from major producers and fears that an economic slowdown will dampen the outlook for demand. Oil’s troubles pushed the index into a bear market, leading to a nearly 30% drop from recent highs.

This sharp fall in price has led to a $1 trillion drop in values of oil and gas companies from all around the globe, per Rystad Energy. The biggest publicly traded oil and gas company, Exxon Mobil Corporation (XOM - Free Report) alone bled $35 billion on the Wall Street. Another energy mammoth, Royal Dutch Shell plc (RDS.A - Free Report) saw its market capitalization go down from $292 billion on Oct 3 to $272.5 billion on Nov 21, while $240 billion was wiped off from energy stocks on the S&P 500 Index.

Let’s look at the factors weighing on crude prices:

Supply Glut

Increasing crude stockpiles are playing a major role in the oil slump. Per Energy Information Administration (EIA), in the United States, crude inventories surged 4.9 million barrels last week, much higher than the expected 2.5 million barrels. In fact, the EIA reported increases in each of the last nine weeks. By the end of November, additional 1.7 million barrels are estimated to be added to the inventory.

It is to be noted that increased production from the United States attributed largely to the supply glut, alongside several OECD countries. Output from several shale plays like the Permian Basin, Bakken, Eagle Ford, as well as offshore fields of the United States rose tremendously in the last few quarters. Companies like Concho Resources Inc. (CXO - Free Report) , QEP Resources, Inc. (QEP - Free Report) , Encana Corporation (ECA - Free Report) and others reported strong third-quarter results primarily due to this rise. QEP Resources – a Zacks Rank #2 (Buy) company – is aggressively transforming itself into a Permian-focused company, which enabled it to ramp up its production from the region by more than 100% in third-quarter 2018. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Also, an International Energy Agency (IEA) report suggests that global surplus for fourth-quarter will touch 0.7 million barrels per day (MMBbls/d). Moreover, if the supply glut persists in the oil market, the surplus will rise to 2 MMBbls/d in the first half of 2019. The surge in inventories is strong enough to push global oil prices down.

Sanction Waivers

The decision by the United States to offer waivers to some of Iran’s biggest buyers also played a significant part in the price slump. While everyone was hoping for tighter oil supply post-sanctions, the waivers minimized the impact to a large extent. As a matter of fact, eight countries received concessions from the U.S. government, which includes booming Asian economies like India, Japan, South Korea and others. China, another significant importer of Iranian crudes, is still bringing crudes from the OPEC-member country. The gap between expectations and reality has hit the commodity hard.

Drop in Demand

Even the demand side looks jittery with OPEC and the IEA forecasting weaker consumption. Per the IEA, demand is expected to fall in several non-OECD countries primarily due to currency devaluations and falling economic activities, stemming from tariffs and increasing interest rates. Demand from non-OECD countries is estimated to fall 165 thousand barrels per day (MBPD) next year. Oil demand growth from OECD countries is also expected to fall. In 2018, demand is expected to rise 355 MBPD, which will likely fall to 285 MBPD next year.

The gap between supply and demand of oil can further drag prices down.

Further, in its latest report, the OPEC cut its forecast for oil demand next year for the fourth month in a row. The organization now projects demand to increase 1.29 million barrels a day in 2019, down 70,000 barrels a day from last month's projections.

There’s Hope

Investors are eagerly looking forward to the OPEC/non-OPEC Meeting, which will take place in Vienna on Dec 6. Countries involved in the meeting might introduce a set of production cuts, which can stabilize prices. Reportedly, the entente will discuss the possibility of reducing daily production by almost 1.4 million barrels. Given the present situation of supply glut, the production cut can reduce the gap between demand and supply and push prices up in the process.

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