OIL FORECAST TO TRADE AT UP TO $70 PER BARREL BY SECOND HALF OF 2019

Apicorp says that supply cuts by Opec and its allies may not be sufficient on their own to balance the market

Oil prices are expected to trade between the $60 and $70 per barrel range towards the second half of the year with the market expected to balance itself out, according to Arab Petroleum Investments Corporation.

The price scenario held up “barring a sharp slowdown in the global economy”, the Riyadh multilateral bank said.

“In the last few months of 2018, the tensions between fundamentals, sentiment and prospects about the macro environment all shaped price behaviour and this will continue in 2019,” it added in its report.

Opec’s primary challenge this year will be to address the physical market imbalances, and assert credibility to consistently manage expectations and sentiment, the bank said.

Opec and sovereign producer allies outside the exporters’ group led by Russia agreed in December to cut production to the tune of 1.2 million barrels per day starting January for a period of six months. The decision came amid a drastic drop in oil prices, which after rallying for much of the year at $70 per barrel for Brent, peaked at $86.9 in October before plunging to 30 per cent of its value the following month.

Rising production from North American shale basins, particularly the US, which surged past 11 million bpd in August, outpaced sovereign producers Saudi Arabia and Russia and was one of the factors behind the market’s oversupply, the report said.

Apicorp noted that the cuts to production undertaken by Opec and allies may not be sufficient to balance the market, where there may be build-up of inventory levels. This is particularly as US shale is expected to top 12 million bpd during the second half of the year.

“The dynamics of oil prices in 2019 will also depend in large part on Opec’s effectiveness in implementing the cuts, balancing the market and reinforcing the credibility of its signals,” said the report.

“Assuming that the cut is implemented in full, Opec’s reduction of 0.8 million bpd from October level, estimated by secondary sources at around 33 million bpd, will keep Opec output at about 32.2 million bpd, implying that stocks would continue to build at a rate of around 0.6 million bpd,” it added, citing figures from the International Energy Association.

Moody’s also raised similar concerns about the effectiveness of Opec’s output cuts and ability to maintain compliance this year, as the reduction comes after already record-high production by Saudi Arabia and Russia.

The producers decided to boost production in May to moderate rallying oil prices amid pressures from the US to push them lower ahead of midterms.

The supply boost, as well as the granting of waivers to countries to trade with Iran following the introduction of sanctions in November, led to a glut in the market and the eventual steep decline in prices, which fell to $54 for Brent by the end of 2018.

“Very high Saudi and Russian production, in particular, has heightened supply volatility,” said Steve Wood, Moody’s managing director for oil and gas.

“So whether Opec and Russia maintain production discipline and renew agreements to limit output are key concerns going into the new year.”