Cautious trading prevails in the oil market today across both major crudes Brent and WTI amidst a general downtrend.
The quiet movement in oil prices comes as we await the OPEC conference. While we are still witnessing a stream of mixed data from both China and the United States that the markets are counting on to clarify the future outlook for demand for crude.
While OPEC will continue to defend oil prices by extending production cuts into next year, I believe the problem lies more on the demand side than the supply side. Despite the production cuts, prices are still in a deep decline.
The data emerging from the largest importer of crude, China, continues to be a negative factor for crude prices. Despite expectations of pre-stockpiling ahead of the imposition of tariffs on Chinese goods imports to the United States, export growth slowed more than expected in November to 6.7% year-on-year compared to 12.7% in the previous reading. Moreover, imports unexpectedly contracted by 3.9%.
Therefore, China still seems to be suffering from an inability to revive demand, whether domestic or foreign, so far. While the impact of support packages and reform plans is expected to crystallize over the coming year, in addition to potential positive results from negotiations with the incoming Donald Trump administration on less stringent trade terms towards China to support growth and the subsequent support for oil prices. I believe that the above factors are the key factors that will drive future trends in crude prices.
In addition, the continued flow of shocking data from Europe may continue to pressure crude prices to decline, as the weak economic activity there has an impact on China, whether as a destination for exports or imports. This disappointing performance of the regional economy comes in light of concerns about the trade war, the escalation of the war in Ukraine, and political unrest. While the latest shocking data was the Sentix Investor Confidence reading, which fell faster than expected in November and the report indicated an “absence of optimism” in Germany.
On the geopolitical side, the Middle East may become less influential in oil prices with the potential diminishing of the risk premium around disruptions to crude flows from the region. After the fall of the Bashar al-Assad regime in Syria, Iran may become even weaker than before and less able to threaten Israel and economic interests in the region.
Syria was the most important corridor to bypass US sanctions and a destination for Iranian oil exports. Therefore, this structural shift may make Iran less willing to escalate in the region, which may entail risks to the safety of crude flows, which are now tighter for Iran.
