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Future of oil prices in short to medium term

Presently, US-China trade war is the single most important factor that is governing oil demand and hence its international price. Even global economic growth hinges upon striking a deal between the two power houses. The markets appear to have turned bearish with supply/demand imbalances. Adding fuel to the fire, Saudi Aramco drone attacks was an epic event that led to the biggest supply disruption in history and provides temporary support for higher oil prices.

Although the current environment may not be conducive for higher oil prices but there are certain factors that support upward price trajectory. Higher oil prices will also support launch of Aramco’s IPO, the world’s largest listing ever. This article aims to analyze various factors that support bullish oil prices as and when a trade deal is reached between China and the US.

US-China deal

The long-running trade war between the world’s two biggest economies has brought about a general slowdown to the global economy. Negotiations between Washington and Beijing have been long, intermittent and protracted with plenty of blame game from both sides. However, there seems to be some light at the end of the tunnel as in the first phase of the interim deal, the warring nations have agreed to a phased rollback of extra tariffs. This will be enough for relieving economic tensions for next year. Currently, oil is trading in the range of $55-$60; a US-China deal will support prices in the range of $60-$65.

 

Geopolitical risks

Theoretically, rising geopolitical risks, particularly in the Middle East — home to more than 60 percent of the world’s oil reserves — is bullish for oil. Tensions between Iran and Saudi Arabia reached a boiling point following the September 14th attacks on Aramco’s oil facilities. Apart from China, US have entered into a feud with European Union as well that is desperate to forge a new nuclear deal with Iran. If the US and EU are unable to forge a deal, tensions between Iran and Saudi Arabia are likely to escalate. While chances of an all-out war with the US or Saudi Arabia appear slim, tensions in the region are likely to remain high and increase the supply risk.

Decline in US crude oil inventories

Due to collapse of rig count in the US, there will be reduced drilling as a result of which there will be lower production next year. A significant decline by the world’s biggest oil producer is very likely to impact oil prices in a positive way, though this is unlikely to happen in the near future.

Crisis for refiners

According to the new rules by the International Maritime Organization (IMO), only 0.5 percent or lower sulfur fuel oil should be used on ships beginning January 1, 2020, unless said ships have installed the so-called scrubbers — systems that remove sulfur from exhaust gas emitted by bunkers — so they can continue to use high-sulfur fuel oil (HSFO). The new fuel specifications are set to send shockwaves through the entire supply chain in the shipping industry — from crude oil producers, to refiners, to traders, to shippers, to end-consumers of everything traded on ships. However, supply of compliant low-sulfur fuel could be just as sufficient, while demand may be subdued, due to the global economic and trade growth slowdown.

The writer is a Karachi based freelance columnist and is a banker by profession. He could be reached on Twitter @ReluctantAhsan

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