WILL OIL FLAME OUT?
london — After oil enjoyed a three-month rally over the course of 2019, certain factors are set to test its resilience once again.
The commodity fell about 2 per cent on Friday, slipping further from 2019 highs as focus shifted to a lack of progress in US-China trade talks and as grim manufacturing data from Germany and the US reignited fears of a slowdown in the global economy and oil demand.
Brent crude futures were at $66.58 per barrel at 1507GMT, $1.28, or 1.9 per cent below their last close and down about 0.8 per cent on the week. The contract hit a four-month high of $68.69 on Thursday.
The global benchmark has risen by more than 20 per cent since the beginning of January, due to supply cuts by Opec and allies, such as Russia, and US sanctions on Iran and Venezuela.
US West Texas Intermediate (WTI) futures were down $1.48, or 2.5 per cent, at $58.50 per barrel. WTI marked a 2019 peak on Thursday at $60.39 and is set for a third consecutive week of gains, rising by about 0.1 percent on the week.
“Oil prices have come under pressure in [Thursday’s] trading session because of profit-taking and uncertainty surrounding the US-China trade talks,” said Abhishek Kumar, head of analytics at Interfax Energy in London.
Nevertheless, bullish sentiment is set to prevail in the near term, helped by output cuts by Opec and its allies and sharply falling production from Venezuela and Iran, Kumar said.
As economic growth has slowed across Asia, Europe and North America, potentially denting fuel consumption, no breakthrough has emerged in the trade stand-off between Washington and Beijing, at least before meetings scheduled on March 28-29.
Oil prices came under pressure... because of profit-taking and uncertainty in US-China talks Abhishek Kumar,
Head of analytics at Interfax Energy
With budget needs at above $85 per barrel, the Saudis need prices at above $70 per barrel Gary Ross,
CEO of Black Gold Investors
Three in four Japanese companies expect US-China trade frictions to last until at least late this year, a Reuters poll found. A jump of more than two million barrels per day in US crude oil production since early 2018 to a record 12.1 million bpd has made the United States the world’s biggest producer, ahead of Russia and Saudi Arabia.
This has resulted in increasing exports, which have doubled over the past year to more than three million bpd. The International Energy Agency estimated that the United States would become a net crude oil exporter by 2021.
US energy firms last week reduced the number of oil rigs operating for a fourth week in a row, with drilling slowing to its lowest in nearly a year, energy services firm Baker Hughes said. Fresh data was due on Friday.
Still, oil prices this year have been propped up by supply cuts by the Organisation of the Petroleum Exporting Countries and allies such as Russia.
More shale? Who cares?
However, Saudi Arabia, the world’s top oil producer, also wants to make sure it avoids a repeat of the 2014-16 oil price crash below $30 per barrel, sources familiar with Saudi policy said.
Budget needs are forcing Saudi Arabia to push for oil prices of at least $70 per barrel this year, industry sources say, even though US shale oil producers could benefit and Riyadh’s share of global crude markets might be further eroded.
The export cuts are designed to prop up prices, sources close to Saudi oil policy say. Saudi officials say the kingdom’s output policies are merely intended to balance the world market and reduce high inventories. “The Saudis want oil at $70 at least and are not worried about too much shale oil,” said one industry source familiar with Saudi oil policy.
Another source said Saudi Arabia wanted to “put a floor under oil prices” at $70 or slightly lower, and added: “No one at Opec can talk about output increases now.”
Loss of market share
Saudi Arabia plans to reduce March and April oil production to under 10 million bpd — below its official Opec output target of 10.3 million bpd. Saudi Energy Minister Khalid Al Falih said such swings were not unusual because last year the kingdom had raised output and exports above targets to avoid imminent shortages. Saudi Arabia has also been advocating an extension of Opec-led supply cuts beyond June until the end of 2019.
“With budget needs at above $85 per barrel, the Saudis need prices at above $70 per barrel,” said Gary Ross, chief executive of Black Gold Investors and a veteran Opec watcher.
“They also need to convince Russia that the strategy of output cuts makes sense despite the loss of market share to the United States,” he said. —