Outlook for oil prices

Oil has performed well in the second half of June in the backdrop of an escalation of tensions between Iran and the US, with President Trump focused on curbing Iran’s nuclear threat with the implementation of further oil sanctions. Iranian crude oil exports fell to 225,000 barrels per day at the end of May, from a high of 2.5m barrels per day in April 2018. This is a significant loss of output for the global oil market.

The recovery in risk assets also contributed to the oil market sharp bounce in June. In May, a conjunction of disappointing manufacturing and leading survey data coupled with an escalation in trade dispute between China and the US triggered a 20% fall in the oil price as demand expectations were revised down.

OPEC+ meeting crucial

The above factors make the next ‘OPEC+’ meeting important in assessing how much supply the group is expected to produce over the rest of 2019. Whilst ongoing geopolitical concerns in the Middle East are likely to continue to benefit oil prices, and reduce the need for significant reductions in oil production, OPEC’s eyes will be focus on the G20 summit on 28-29 June where President Trump and President Xi are expected to meet.

The prospect of a trade truce between the two largest economies and a potential Fed rate cut putting downward pressure on the dollar would be a positive boost for oil demand. It makes sense therefore that the OPEC+ meeting was delayed from the original dates of 25-26 June (before the G20 summit) to 1-2 July (after the G20 summit).

Supply and demand dynamics

Notwithstanding the uncertain outcome on trade negotiations between the US and China, the supply side of the oil price equation is also something which the OPEC+ will discuss at length. Since February, US oil shale production has increased by around 900,000 barrels per day, to reach 9.2m barrels per day.

Against the backdrop of increasing supply, the US has seen an increase in inventories at a time when the manufacturing activity is close to contraction.

Implications of OPEC+ for investors

It is likely that the OPEC+ will decide to extend the cut for another six months to prevent the oil price from falling due to an increase in supply. For these reasons we believe Brent prices will remain range-bound and will move back into balance at around $70 per barrel in the second half of 2019, with volatility expected to persist due to the conflicting forces exerted by supply shocks and demand fears.

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