Oil Slump Highlights Anxiety Over Weak Emerging Markets in 2019

Just weeks after oil traders were touting $100 a barrel, those predictions now seem a distant memory.

Oil is trading more than $10 a barrel lower than it was earlier this month, when it reached a four-year high. More Saudi and Russian crude, higher-than-expected Iranian exports and a sharp drop in gasoline refinery margins are playing a part in the sell-off. Lurking in the background is a much bigger threat: the possibility of the global economy heading into trouble in 2019, curtailing oil demand growth.

“Next year’s oil balance is bearish, let’s face it,” said Tamas Varga, an analyst at PVM Oil Associates Ltd. “The dump is understandable, and if the Saudis are actually going to increase production, I don’t think the market will recover.”

Here’s a look at the main factors behind the price tumble in recent weeks.

Who Will Buy?

Traders have pointed to a broader selloff in equity markets as putting pressure on oil prices, spurring concerns about sluggish global economic growth. For emerging markets, that’s especially painful. Crude has reached record prices in the local currencies of Brazil and Turkey this year, while others including India have seen soaring fuel bills. The recent price drop “comes as little surprise with attention now clearly being focused on the weakening economic situation and gloomy demand outlook,” JBC Energy GmbH said in a research note.

Pump All You Can

OPEC and its allies are in a “ produce as much as you can mode” in order to replace any looming shortages, Saudi Energy Minister Khalid Al-Falih told an energy conference in Riyadh this week, adding that his country will likely lift output in the coming months. Add to that higher Russian production, a return of Libyan output, and the market is finding healthy supply just at a time when demand is waning.

Iran Worries

U.S. sanctions snap back on Iran in less than two weeks, and traders have banked on a steep drop in crude supplies from the Islamic Republic. However, buyers of Iranian crude are said to be increasingly confident that they will get at least some waivers when the U.S. measures return on Nov. 4. At the same time, tracking Iranian exports has become trickier as the country’s oil tankers switch off transponders, leading to a higher revision of previous exports as the ship signals reappear.

Margin Call

Refineries are feeling the slump in demand as well. In Europe gasoline cracks this month dropped to the lowest level since 2013, while those margins in the U.S. reached a 2-year low. Add to that a market structure that indicates short-term weakness, and there are plenty of signs of stress on physical supplies. “The refinery margins are hurting, and that is just because there is not enough demand to absorb all the products, especially gasoline,” said Petromatrix GmbH Managing Director Olivier Jakob.

Technical Tumble

Compounding oil’s suddenly bleaker outlook was a sudden crash through major technical hurdles. Brent slumped quickly through its 50-day and 100-day moving averages on Tuesday for the first time since August. That could pave the way lower to the next major psychological barrier, the 200-day moving average, which is around $74 a barrel, according to CMC markets analyst Michael Hewson. It’s a move that may have room to run, with Brent not yet oversold on its 14-day Relative Strength Index.