Expect tighter oil markets next year as Opec output falls

Brent futures trading at a contango as demand has propped up after massive sell-off

Oil markets will be in a tighter position in 2019 than they are today on the supply front on expectations of lower output from Opec plus countries along with falling production in Canada and the United States, according to UBS analyst Giovanni Staunovo.

The Opec+ countries decided to cut output by 1.2 million barrels of oil per day (mbpd) from January for the next six months and will review the situation in April. They decided to give exemptions to Iran, Libya and Venezuela.

“We expect Iranian and Venezuelan output to fall further over the coming months, so Opec’s share of the cut could actually exceed 0.8 million bpd,” Staunovo said in a note.

Currently Opec producers will shoulder 800,000 barrels per day of cuts and the remainder will be borne by Russia and its allies. Elsewhere, Staunovo expects Canadian production to decline by another 100,000 to 150,000 bpd in January following government-mandated cuts in Alberta, and he expects pipeline constraints to slow US crude production growth in the coming months.

The supply constraints would give underlying support to prices that may recover to $70-$80 (Dh257-Dh294) per barrel from $61 yesterday, according to UBS and Bank of America Merrill Lynch (BoAML).

Before the deal was struck, oil markets were in total disarray after prices fell from a high of $86 per barrel on concerns about oversupply.

Oil prices have been on a recovery mode after the deal.

Massive sell-off

Brent futures have started to trade at a contango because demand has propped up after the massive sell-off seen in the past two months. The market was in backwardation earlier because traders shied away from high prices.

“As Opec+ removes excess barrels, we see front-to-third month timespreads for Brent swiftly moving into backwardation. Still, the surge in US supply in recent months should be a reason for caution,” BoAML said in a report led by executives Francisco Blanch and others.

Brent for February delivery on the Intercontinental Exchange traded at $61.70 yesterday, at a premium of 15 cents to March delivery.

We expect Iranian and Venezuelan output to fall further over the coming months, so Opec’s share of the cut could actually exceed 0.8 mbpd.”

Giovanni Staunovo |

UBS analyst