Global markets were volatile heading into the new year. Oil has been no exception, with Brent trading between $62 per barrel on 7 December 2018 before falling to $51/b on 21 December. Mixed macroeconomic data have driven much of the volatility, with political uncertainty compounding concerns of a sharper than expected economic slowdown.

What oil price is justified by the fundamentals? Ann-Louise Hittle, vice president, for macro oils at Wood Mackenzie, says that their analysis indicates the oil market was overbought in October, when Brent reached US$85/b, and oversold in December when it dropped back to UD$51/b.

“Despite our view that there was ample supply through to the end of 2019, fears of a lack of OPEC spare capacity, concerns of an ensuing supply crunch, and focus on a US$100/b end-point back in October led to inflated prices. In contrast, December’s sharp fall was the result of over-selling on fears for global economic growth – largely driven by the US-China trade war, and a perception that OPEC would not cut output enough,” Ms Hittle added.

“Wood Mackenzie has adjusted our annual average price forecast for Brent by just one dollar – from US$66/b for 2019 to US$65/b per barrel. Our forecast of US$68/b for 2020 remains unchanged.”

Ms Hittle said that since trading resumed in January, the oil market has rebounded as the impact of production cuts from producers such as Saudi Arabia started to be felt.

However, the market remains focused on the demand outlook, and there are a number of risks to the global economy that could depress the modest growth we forecast in oil demand and dampen the oil price outlook.of economic activity point to manufacturing slowdown in the US, Europe and China. This tallies with data pointing to weakening global trade.

Ed Rawle, Wood Mackenzie’s chief economist, says that global GDP growth is slowing off a strong 2018 base.

“The question is how quickly the world economy decelerates. Sharp declines in survey measures of economic activity point to manufacturing slowdown in the US, Europe and China. This tallies with data pointing to weakening global trade.

“Some of the current slowdown is linked to the global economic cycle, but there is concern that political uncertainty will exacerbate the cyclical downswing and send key markets into recession. With US-China trade negotiations ongoing and Brexit hanging over Europe,  the risk of worse-than-expected slowdown is mounting. And this time around, there is little in the way of firepower available to policy makers to help stimulate the economy if things do get ugly. The market is right to be concerned.

“Having said that, Wood Mackenzie expects a benign global economic slowdown, with global GDP growth decelerating from 3% in 2018 to 2.8% in 2019 and 2.6% in 2020. In our base case, we expect global oil demand to grow 1.1 million barrels per day (b/d) in 2019 and 1.3 million b/d in 2020,” he added.

Despite the weakening sentiment about the global economy, Wood Mackenzie says oil demand growth remains robust, for now.  On the other hand, supply growth is also slowing. After an estimated increase of 2.5 million b/d in 2018, global supply is forecast to grow 1.4 million b/d in 2019 and 1.8 million b/d in 2020. This assumes OPEC continues to restrain production through end-2020. With non-OPEC supply expected to increase, the OPEC+ cuts are critical to prevent significant oversupply.