A trade deal between China and the United States still seems a long way off, negatively impacting global economic growth. This negative sentiment also has consequences for oil demand, which means that the oil price is expected to remain at a low level for the time being, according to a new report from ABN Amro.
ABN Amro expects the price for Brent oil to fall to $60 a barrel by the end of the year, compared to $70 a barrel previously. For WTI oil, the bank assumes a price of $55 per barrel. The lower prices are mainly due to the long-lasting effects of the trade war between China and the United States. Since there is no deal in the offing between the countries yet, the oil price is expected to remain low in 2020 and 2021.
Smaller difference
The price range for Brent oil has been $50 to $76 a barrel in recent months and WTI oil has been $42 to $66 a barrel. ABN Amro expects that the bottom of this range will be sought again in the short term, although the bank does not foresee that the price will remain at this level. Such a short-lived price drop could be the result if the trade war escalates again or if market sentiment remains negative.
It is striking that the difference between the price of Brent and the price of WTI is reportedly set to fall below $5 a barrel. This is partly because the effects of the trade war are better reflected in the price of Brent. WTI is mainly influenced by developments within the United States. With this country starting to export more oil, the price of WTI is also being affected by global developments and tensions.
Different risks
If an agreement is reached between the United States and China, it could give a positive boost to sentiment in the market. That would increase the demand for oil, causing the oil price to rise. However, the other way around is also the case. If China decides to buy additional oil from Iran to defy the United States, the global supply of oil could increase further lowers).
A second risk is the growth of shale oil production in the United States. This country is currently the largest oil producer in the world and production is expected to continue to increase in the coming years. This also leads to a larger supply. The downside, however, is that people wonder at what rate growth will continue. If the market overestimates supply in the United States, it can lead to higher prices.
Tensions in the Middle East also play a major role, although in the long term they will probably mainly cause higher oil prices. ABN Amro does not expect that there is a great chance that oil production and/or exports will be affected by the tensions in the Gulf region, but does not want to rule this out completely. After all, if the transit through the Strait of Hormuz is hindered, the oil price will rise sharply.
In addition, the minister has indicated in Saudi Arabia that he will do everything he can to stop the fall in the oil price, for example by implementing a further decrease in production. According to ABN Amro, however, the country will lose extra market share. This also applies to the OPEC countries, because production there has also been reduced considerably in recent months. According to the bank, it is then difficult for members to keep to their own agreements.