Why oil prices are (suddenly) volatile

on Dec 22, 2019
Updated: Mar 11, 2020
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  • With the level of volatility being experienced in the oil markets, it is increasingly becoming difficult to predict oil prices, according to experts who spoke to CNBC.
  • Tamas Varga, a senior analyst at PVM Oil Associates, noted that economic and geopolitical developments change almost daily and all these affect oil prices.
  • According to Rystad Energy, the supply cuts could push Brent below $40s in the short-term.

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Experts told CNBC that the crude market has become highly volatile these past few months, making it virtually impossible to predict future prices.

Throughout the year, oil prices have been affected by several things, including OPEC’s supply cuts, China-US trade war, and US sanctions to oil exporters.

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Apart from a growing concern on the overall global health economy, the US crude oil inventories have been surging capping global gains.

Tamas Varga, senior analyst at PVM Oil Associates, in a research note said: “There are so many uncertainties surrounding the oil market that it makes it virtually impossible to predict developments for the rest of the week let alone for months or a year ahead.

“There are economic and geopolitical developments to deal with, and these can change almost daily,” Varga added, describing the current market conditions as a “forecasting nightmare.”

Earlier this year, President Trump called on OPEC to ramp up supply saying global oil prices were skyrocketing. However, OPEC ignored Trump’s advice and instituted further supply cuts in a bid to boost the commodity’s global demand.

“In a world where we saw Brent at $50 a barrel in December in 2018 and now back to over $70 this year, I think it is a very brave person that attempts to forecast what the price will be at the end of the year,” Neil Atkinson, head of the oil industry and markets division at the IEA told CNBC.

A section of investors is still worried that the looming economic crisis could further be fueled by the pending impeachment of President Donald Trump, next year’s US elections, and the mild effect of the Phase One trade deal could dent the demand for oil.

Early this month OPEC+ decided to further cut oil supplies until March 2020, a move that is expected to stabilise oil prices. A team of experts from Rystad Energy predicted an oversupply of about 800,000 barrels per day during the first half of 2020 if the Organization of the Petroleum Exporting Countries had failed to institute the supply cuts.

The supply glut could trigger a price correction and push Brent below $40s in the short-term, Rystad energy noted.

As we cross over to 2020, market players will be keen the see the impact of the cuts. Oil giants like Aramco are keen on ensuring the demand for oil soars, to boost share prices.

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