..May Extend Cut To 2nd Half Of 2019
Yemisi Izuora
Oil prices hovered just below 2019 highs early on Tuesday, supported by ongoing supply cuts led by Organization of Petroleum Exporting Countries, OPEC.
Similarly, U.S. sanctions against oil producers Iran and Venezuela are also boosting crude prices, although traders say the market looks capped by rising American output.
The U.S. West Texas Intermediate (WTI) futures were down four cents at $59.05 per barrel close to the 2019 high of $59.23 reached the previous day,,while the Brent crude oil futures were down six cents at $67.48 per barrel, within a dollar of this year’s high of $68.14 reached late last week.
The OPEC, on Monday scrapped its planned meeting in April, effectively extending supply cuts that have been in place since January until at least June, when the next meeting is scheduled.
The producer club and a group of non-affiliated producers including Russia, known as OPEC+, started withholding supply to halt a sharp price drop in the second half of 2018, when markets came under pressure from surging output as well as an economic slowdown.
“The OPEC+ deal has brought stability to crude prices and signs of an extension have taken crude higher,” said Alfonso Esparza, senior market analyst at futures brokerage OANDA.
“The ball is now on the U.S. production side with the weekly crude inventories an upcoming indicator to be taken into consideration when it’s released on Wednesday,” he added.
U.S. crude oil output has soared by more than 2 million barrels per day (bpd) since early 2018, to around 12 million bpd, making America the world’s biggest producer ahead of Russia and Saudi Arabia.
Weekly production and storage data is due to be published by the U.S. Energy Information Administration (EIA) on Wednesday.
On the demand-side, there is concern that an economic slowdown as well as improving energy efficiency and the emergence of alternative transport fuels will erode oil consumption.
Bank of America Merrill Lynch said in a note that economic “risks are skewed to the downside” and that “we forecast global demand growth of 1.2 million bpd year-on-year in 2019 and 1.15 million bpd during 2020.”
The bank said it expected “Brent and WTI to average $70 per barrel and $59 per barrel respectively in 2019, and $65 per barrel and $60 per barrel in 2020.”
Meanwhile, Secretary General Mohammad Barkindo, said on Sunday that compliance with a supply cut agreement between OPEC and non-OPEC members was improving, and that this would help the oil market to weather through the build up of oil inventories.
“There is a remarkable improvement on the level of compliance,” Barkindo said.
“The market will weather through a possible rebuild of inventories, which is our focus of attention, and ensure that we have supply-demand balance through the quarters,” he added.
“We are super focused on this common objective,” he added.
Also, Saudi Arabia said on Sunday OPEC’s job in rebalancing the oil market was far from done as global inventories were still rising despite harsh U.S. sanctions on Iran and Venezuela, signalling it may need to expand output cuts into the second half of 2019.
In addition, Russia which is cutting oil output in tandem with OPEC, also said production cuts would stay in place at least until June, when Washington’s next steps on reducing Iran’s and Venezuela’s oil exports become clearer.
The United States has been increasing its own oil exports steeply in recent months while imposing sanctions on Venezuela and Iran to reduce their shipments to global markets.
Washington’s policies have introduced a new level of uncertainty for OPEC as it struggles to predict the balance of global supply and demand.
“My assessment is that the job still remains ahead of us… We are still seeing inventory builds… We need to stay the course certainly until June,” Saudi energy minister Khalid al Falih said on Sunday.
“We like to remain ready to continue monitoring supply and demand and do what we have to do in the second half,” said Falih as some OPEC ministers met in the Azeri capital of Baku for the monitoring committee of OPEC and its allies like Russia.
OPEC and its allies have cut output by 1.2 million barrels per day – or 1.2 percent of global demand – since January to help rebalance the global oil market and prop up prices.
The United States has imposed stiff sanctions on OPEC’s third largest oil producer, Iran, but has given some waivers to buyers of its crude until May.
Washington is also trying to oust Venezuela’s current president, Nicolas Maduro, and has imposed sanctions on that country’s oil.
Russian Energy Minister Alexander Novak said it was hard for Moscow and OPEC to plan due to the U.S. sanctions. He said they would have little additional information by their next meeting in April, given that Washington will not yet have announced its new waivers on Iran and that more talks would be needed in May.
“Those sanctions are creating negative trends in the market and are completely distorting the supply and demand picture… They are imposed to help sell goods of the country that is imposing the sanctions, and they create uncertainty,” he said.
Russia has been slow to cut its oil output in line with January targets, saying it is difficult to do so in winter.
Saudi Arabia has therefore cut its own oil output to well below its targets to compensate for other producers but Falih said this would not “continue indefinitely”.
Novak said Russia was now approaching full compliance and was close to cutting 140,000 bpd. Falih said Saudi exports would remain below 7 million bpd in April and March.