If Saudi Arabia is not careful, oil prices could go sub $50: David Lennox, Fat Prophets

Overproduction by Saudi and prediction of softening demand in 2019 led to price crash, David Lennox, resource analyst, Fat Prophets, tells ET Now.

Edited excerpts:

Overnight there was a 6% fall in Brent crude and 7% in WTI. What triggered the worst fall in almost three years?

One of the key reasons would be that Opec did in fact increase oil production through the month of October by a significant amount. It has been doing around 32.5 million barrels a day and through October that increased to 32.9 million barrels. That in itself certainly gave the market a bit of a concern. There was a further increase of 1,27,000 barrels a day in Saudi production. Put together, the market became very concerned about the direction of supply in real terms.

The other factor was Opec recently suggested that demand growth is going to be a little softer.


These factors affected oil prices in a negative manner.

How do you see the oil supply demand balance and do you think the OPEC needs to step in?

We certainly do think that OPEC will step in. A week a two ago, the Saudis and Russians together were saying that in 2019 they would be looking to cut production. We now know why they came out with that statement. It is primarily because there is adequate supply in the market and of course, demand may be softening.

We thought it would come in at round about 99.5 million barrels. OPEC’s estimate for the next year is just over a 100,000 million barrels. So, from that perspective, we still believe that there is some time to go before we would see the real demand figures for 2019. If we are right then we will definitely require OPEC to cut back from the 32.9 million barrels that they did for the month of October. If they do not, then could see oil prices going sub $50.

Where do you expect crude prices to stabilise? Big broking houses had been talking about $90 and $100 for Brent by December. That seems unlikely anytime soon.

We were quite sure that we would not see a $100 Brent price this year. We have a range of between $74 and $84 for the calendar year end and even now that is starting to look a little bit far off. But we do believe that with Russia and the Saudis coming out and suggesting that they will make cuts in production in 2019, the prices we are seeing now probably somewhere near the inflection point for both Brent and WTI.

There are a couple of factors that we will be watching however. We are sneaking up again on the next weekly round of US announcements regarding their oil circumstance. If we see that production is increasing again, that could give us a second downward wind in oil price in the near term.

We are watching very closely for the releases of those numbers on Thursday evening our time.