As oil prices dwindle by more than a third of what they were in the previous quarter, the oil market has entered extremely bearish waters, even factoring in today's 8% recovery.
This has resulted in OPEC's decision to extend supply cuts, which had originally been set at 1.2 million barrels a day. Russian Energy Minister Alexander Novak thinks these cuts will eventually contribute to the stabilization of oil prices early next year.
"I think that during the first half, due to joint efforts, which were confirmed by the OPEC and non-OPEC countries this December, the situation will be more stable, more balanced," Novak said.
There is a direct correlation between the price of oil and economic outlook, because oil is so intrinsically linked to demand-side consumption and use in daily life. Thus, if the economy is expected to contract, then it's likely that this will have already been priced in for the 2019 commodity outlook, reaffirming bearish expectations. Given that many analysts expecte to run into a slowdown next year, especially since unemployment is low and the Fed has implemented the rate hike program to stem inflation, it is therefore likely that prices will continue to remain low.
Still, Suhail al-Mazrouei, UAE's Minister of Energy claims that OPEC will adjust supply as it sees fit in order to ensure the oil market corrects itself: "What if the 1.2 million barrels of cuts are not enough? I am telling you that if it is not, we will meet and see what is enough and we will do it," he said. "The plan [to cut oil production] is well studied but if it does not work, we always have the power in OPEC to call for an extraordinary meeting. If we are required to extend for [another] six months, we will do it...I can assure you an extension will not be a problem."
The supply-demand discrepancy plaguing the oil market may not be ameliorated so soon, as there is still an oil glut but weak demand. Fundamentals do not change over the short-term, and the cuts will not take effect immediately. The impacts of the cut will only be felt months later.
According to writer Jill Mislinski, the behavioral economic background for oil price changes are too overwhelming to ignore. She says, "There are profound behavioral issues apart from gasoline prices that are influencing miles traveled. These would include the demographics of an aging population in which older people drive less, continuing high unemployment, the ever-growing ability to work remote in the era of the Internet and the use of ever-growing communication technologies as a partial substitute for face-to-face interaction."