Chief economist update: The rise and fall of oil

Crude oil prices rose in the early months of the New Year on the escalation of tensions between the US and Iran after an American drone strike in Iraq on January 3 that killed Qassem Soleimani -- the head of Iran's elite Quds military force.

The price of Brent oil went up by 3.6% to US$68.60/barrel on the day; WTI oil prices increased by 3.1% to US$63.05; and continued to rise after Iran launched ballistic missiles against US forces in Iraq.

Whatever the reason/s or whoever blinked first isn't important but latest reports of the de-escalation of tensions have reversed the climb in oil prices. Brent oil prices declined by 4.4% while the price of WTI oil dropped by 5.1%.

To be sure, the magnitude of the price surge and consequent decline pales in comparison to the experience of September 14 when the price of WTI oil and Brent soared by 15.2% and 11.7%, respectively, after (the US accused) Iran's drone attack on Saudi Arabia's Abqaiq oil-processing plant (estimated to produce around 5% of global oil supply).

But so was the correction, with prices dropping by 16.9% (WTI) and 15.3% (Brent) a couple of weeks after on easing tensions.

Perhaps financial markets have learned their lesson. Perhaps the powers that are have done their sums and realised that war is a zero sum game.

At the end of the day, oil prices respond to the law of supply and demand. While still limping global economic growth is putting downward pressure on prices (less demand), even bigger supply reductions are pushing the other way.

WTI oil has risen by 35.4% and Brent by 34.0% in 2019 after the the Organisation of Petroleum Exporting Countries, Russia and other oil-producing nations - termed "OPEC+" -- agreed to reduce production by around 500 kb/d (kilo barrels per day) to 2.1 mb/d on December 6 last year.

The balance of probabilities points to continued oil price gains in 2020.

In its latest Oil Market Report, the International Energy Agency (IEA) forecast "global oil demand forecasts unchanged at 1 mb/d in 2019 and 1.2 mb/d in 2020".

The improving global economic growth dynamics due to the de-escalation of the US-China trade war - underscored by the agreement on "phase one deal" -- the lessened uncertainty surrounding Brexit and central banks' continued policy accommodation (and this year perhaps, a helping hand from fiscal policy) could revive global oil demand by more than the IEA's forecasts.

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