Oil Prices Tank As Supply Glut Fears Return

Oil prices collapsed on Tuesday for the second time in a week. During midday trading, WTI fell below $55 per barrel and Brent dropped below $65 per barrel. Both benchmarks are off more than $20 per barrel from their October highs.

“Oil prices are under pressure in the face of ample supply, falling stock markets and an increasingly gloomy economic outlook,” Commerzbank said on Tuesday.

Tuesday also saw a plunge in global equities, which is dragging down all sorts of different sectors, including oil prices. “I think you’re going to see a risk-off type of market,” Tariq Zahir, a New York-based commodity fund manager at Tyche Capital Advisors LLC, told Bloomberg. “It wouldn’t be surprising to see new lows being printed on oil” if crude stocks rise sharply. U.S. crude oil inventories likely rose by 3.5 million barrels last week, a sign that the surplus continues to build.

In fact, concerns about a supply glut are growing by the day. The IEA said in its November Oil Market Report that the global surplus could average 0.7 million barrels per day (mb/d) in the fourth quarter.

On the one hand, the meltdown in prices significantly increases the odds that OPEC+ will agree to curb supplies. Saudi Arabia has already announced production cuts on the order of 500,000 bpd for December. Russia has been non-committal, but it would seem likely that the group would agree to curb production to stop the slide in prices. After all, the originally supply cut announced at the end of 2016 was intended to put a floor beneath prices. The group wouldn’t want to see prices crash all over again.

“In our view there is no doubt that production needs to be cut,” Commerzbank said. “This is also illustrated by the IEA’s latest estimates, which point to a massive oversupply on the global oil market next year if OPEC production remains unchanged.” The IEA says the current 0.7 mb/d surplus could balloon to 2 mb/d in the first half of 2019 based on the market’s current trajectory. This situation is putting a lot of pressure on OPEC+ to take action next month.

On the other hand, some analysts and traders are growing concerned that OPEC+ could stage a repeat of the 2014 meeting. If one could pinpoint a single moment in time that crystallized the oil price meltdown between 2014 and 2016, it was the 2014 OPEC meeting. The market was caught off guard by the decision by the group not to cut production in the face of a mounting surplus. The result was a steep selloff that continued more or less for the next two years.''

Now, investors are concerned that the same thing might happen again in two weeks in Vienna. Market watchers are mostly convinced that OPEC+ will cut production, especially since the Saudis are keen to slash output.

But Bloomberg reports that investors are scrambling to secure positions that protect them from a deeper downturn. “Recall oil prices, which had already fallen 29 percent going into the November 2014 OPEC meeting, fell another 10 percent the day after the meeting and were down 25 percent the month after as OPEC disappointed on supply cuts,” Mandy Xu, chief equity derivatives strategist at Credit Suisse, wrote in a note Monday.

Meanwhile, the head of the IEA, Fatih Birol, warned that a production cut could hurt the global economy because of higher prices. He also lamented low spare capacity. These comments are a bit odd and contradictory since cutting production would allow OPEC to rebuild spare capacity.

However, Birol was entirely correct on another account. “The name of the game in the oil market is volatility,” IEA executive director Fatih Birol said at a conference in Oslo. “And with the increasing pressure of geopolitics on oil markets that we are seeing, we believe that we are entering an unprecedented period of uncertainty.”

Crude oil prices have entered a highly volatile phase. Prices fell 7 percent on November 13, and plunged again on Tuesday. The odds are still pretty high that OPEC+ agrees to supply cuts in December, but it isn’t clear that volatility is going away anytime soon.

By Nick Cunningham of Oilprice.com