The recent plunge in crude oil prices to their lowest level since January may be an overreaction to supply and demand fundamentals, analysts said.
In less than one month, West Texas Intermediate crude oil futures crumbled from a peak of $60.43 per barrel July 10 to $51.09/bbl on Aug. 7, driven down by weak demand growth outlooks stemming from concerns over the U.S. trade war with China alongside an ample supply of crude oil in the U.S.
"With no signs that oil fundamentals have significantly worsened, we reiterate our view (admittedly at an even lower oil price) that the oil market is pricing in too dire a growth outlook," Goldman Sachs analyst Damien Courvalin said in an Aug. 7 note.
On Aug. 7, crude oil futures were down almost 4% on the day, reaching lows not seen since January following the release of U.S. Energy Information Administration storage data that outlined an uncharacteristic build of 2.4 million barrels in the week to Aug. 2. The build compared to a 1.4 million barrel decrease in the same week in 2018 and the five-year-average draw of 1.5 million barrels.
The inventory build incited fresh concerns over the global crude oil supply that prompted talk of a possible OPEC policy response to the tumbling prices, analysts said.
OPEC members have been reigning in production for years. Data for July shows OPEC pumped its fewest barrels in more than five years, aided by a huge production decline from its largest producer, Saudi Arabia.
Despite their efforts, "The storm is here anyway," Mizuho analyst Paul Sankey said, noting that OPEC spare capacity is "waiting to re-enter the market," which provides added downside risk.
However, other analysts contended that supply-side concerns may be overstated.
Courvalin said OPEC's actions to lower production should alleviate the bearish supply-side implications of an escalating U.S.-China trade conflict. Further, there is a potential for China to resume large purchases of Iranian or Venezuelan crude, he said.
Couravalin added that with China's purchases of U.S. crude oil down to 150,000 bbl/d, a halt in purchases would have a negligible impact.
"Oil seems to be ignoring a dramatic tightening of U.S. oil supply that is putting supplies below average and is instead focused on an oil glut to be named later," Price Futures analyst Phil Flynn said Aug. 7.
Courvalin said U.S. inventories have been declining over the past six weeks due to "seasonal draws," and the crude oil stock build in the week to Aug. 2 correlated with a decline in crude oil exports.
U.S. crude oil imports increased by 485,000 bbl/d, to 7.1 million bbl/d. Imports are at their highest level since the week ended July 5, Citi Futures analyst Tim Evans said. At the same time, exports fell by 709,000 bbl/d, to 1.9 million bbl/d, the lowest level since October 2018, he said.
Courvalin said the collapse in exports is likely transient.
However, the crude oil price response reflects the view of a global oil supply glut, and outlooks for global oil demand erosion further support that, Sankey said.
The EIA lowered its 2019 global demand growth outlook to a flat 1 million bbl/d year over year. At the same time, it raised its 2020 demand growth forecast from more than 1.40 million bbl/d to more than 1.43 million bbl/d, Sankey said. The 2020 demand growth outlook is "hopeful," he added.
Other analysts acknowledged that the U.S.-China trade war and reports that Germany's industrial production is falling at the fastest rate since 2009 support the tempered demand outlooks. However, long-term demand-side impacts are not as clear.
Goldman Sachs economists still expect that consumers will prevail and help arrest the recent manufacturing slowdown and destocking, Courvalin said. He added that central banks and Chinese authorities also are "clearly committed to preventing further weakness."