Are Oil Prices Going to Crash Once Again?

The first half of the year was a fairly decent one for oil prices as WTI oil cracked the $65 per barrel mark in April. But things started taking a turn for the worse from then on as the price of the commodity fell back to $50 a barrel around mid June.

The oil price rally gained momentum once again, but it was short-lived and the downturn seems to have arrived again. So will we see weaker oil prices in the second half of the year? Let’s find out.

Where Could Oil Prices Be Headed?

The International Energy Agency suggests that the oil market will witness a glut in 2020. This is probably one reason why prices have started retreating as the market is pricing in a potential oversupply.

In fact, the IEA reports that the oil market saw a surplus of 500,000 barrels per day during the second quarter. The agency was originally anticipating a supply deficit of a similar amount. The Agency added:

This surplus adds to the huge stock builds seen in the second half of 2018 when oil production surged just as demand growth started to falter,” the IEA said. “Clearly, market tightness is not an issue for the time being and any re-balancing seems to have moved further into the future.

This glut is expected to happen despite the fact that OPEC has decided to extend the oil price cuts until the first quarter of 2020. The cartel is looking to ensure that oil prices remain high so it is trying to manage the supply. But given the geopolitical tensions and a potential weakness in demand, the price of the commodity could take a hit and head lower.

Demand Could Be a Problem

The EIA has lowered its oil demand estimate to 1.1 million barrels per day for this year. IEA, on the other hand, has reduced its second-quarter demand growth estimate to the tune of 450,000 barrels per day.

Now, there are some who believe that the demand for oil will rebound in the second half of the year. Reuters reports Saudi Energy Minister Khalid al-Falih saying:

The global economy in the second half of the year looks a lot better today than it did a week ago because of the agreement reached between President Trump and President Xi (Jinping) of China and the truce they have reached in their trade and the resumption of serious trade negotiations.

However, don’t count on a turnaround in the oil price scenario just yet as the trade talks might not lead to a conclusion soon enough. As reported by the South China Morning Post, which quoted Shi Yinhong, a professor at Renmin University of China as saying:

“The US administration has kept saying China should go back to the point at which it backtracked, but it hasn’t yet shown any sign that it might reconsider Beijing’s requests,” Shi said, referring to China’s “bottom lines” revealed by Liu after the talks collapsed.

As such, if the trade war keeps raging on, demand for oil could take a hit and exacerbate the glut.

Harsh Singh Chauhan has a wealth of experience evaluating publicly-traded companies across several verticals, including technology, oil and gas, retail, and consumer goods. His financial writing has been published across platforms such as The Motley Fool, TheStreet, and Seeking Alpha. Harsh's philosophy is to find great businesses for the long run based on company fundamentals and industry prospects. Address: 682 Indian Road, Toronto, Ontario, M6P 2C9. Phone: 416-721-8257.


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