Oil Prices Could Slide Further as Bearish Conditions Gain Ground

After a terrific start to the year, the price of oil has slid big time in the past few weeks. West Texas Intermediate (WTI) crude oil prices had hit $66.30 per barrel towards the end of April, but they are now trading at around $54 per barrel.

This big pullback in oil prices can be attributed to the changing demand-supply dynamics in the oil market.

What’s Working Against Oil Prices?

Oil’s rally earlier this year was helped by the OPEC’s conscious decision to cut output. As a result, oil inventories started declining as key OPEC players such as Saudi Arabia strictly complied with the agreed cuts.

More specifically, OPEC and its allies decided to reduce their oil output by 1.2 million barrels per day in the first half of 2019. While that worked for some time, the weakness in demand eventually caught up with the market’s dynamics.

According to Morgan Stanley, key oil consuming countries such as China, the U.S., India, Brazil, and some others account for 48% of global oil demand. As it turns out, the investment bank has reduced its oil demand growth estimates for 2019 to 1 million barrels per day, down 20% as compared to the prior estimate for production of 1.20 million barrels per day.

What’s more, Morgan Stanley has also reduced the lower end of its Brent oil price forecast substantially to a range of $65-$80 per barrel from the prior $75-$80 per barrel.

Surging U.S. Oil Inventories are Another Problem

The growth of oil inventories in the U.S. is showing no signs of slowing down. According to the latest EIA data, crude oil inventories in the U.S. rose 6.8 million barrels for the recently-reported week as compared to an expected drawdown of 849,000 barrels.

This level of inventory build led to the highest inventory levels since July 2017 and was 6% above the five-year average for the first time in 2019. The increase in U.S. oil production is in line with what President Donald Trump has been expecting – lower oil prices.

Trump has been urging the likes of OPEC to boost their output in a bid to lower oil prices. As reported by CNBC:

The gasoline prices are coming down. I called up OPEC. I said, ‘You’ve got to bring them down. You’ve got to bring them down,’ and gasoline’s coming down,” Trump told reporters en route to a National Rifle Association event in Indianapolis.

Now that he is conducting a trade war on many fronts against the likes of China, Mexico, and potentially India, there’s a good chance that crude oil exports from the U.S. could take a hit. As a result, crude oil inventories in the U.S. could build up further and hurt pricing.

In all, a mix of several negative factors ranging from weak demand, higher supply, and uncertain macroeconomic factors could keep oil prices under pressure going forward. As a result, there’s a good chance that oil equities will continue to remain under pressure as long as there’s a negative end-market sentiment prevailing.

The opinions provided in this article are those of the author and do not constitute investment advice. Readers should assume that the author and/or employees of Capital 10X hold positions in the company or companies mentioned in the article. For more information, please see our Content Disclaimer.

Harsh Singh Chauhan
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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