Brent crude ‘hits’ 2019 high amid output cuts
Dovish Fed talk roils dollar
LONDON, Feb 16, (RTRS): Brent crude oil climbed above $65 a barrel to its highest this year as OPEC-led supply cuts and this week’s announcement of a higher than expected cut by Saudi Arabia encouraged investors.
The international oil benchmark reached $65.52 by 1500 GMT on Friday, the 95 cent gain equating to a rise of about 1.5 percent. Brent approached near three-month highs and was set for a gain of nearly 5.5 percent on the week.
U.S. West Texas Intermediate crude futures were up about 1.7 percent, rising 91 cents to $55.32.
The Organization of the Petroleum Exporting Countries (OPEC) and allies led by Russia started voluntary production cuts last month, aiming to tighten the market.
Top exporter and de facto OPEC leader Saudi Arabia said on Tuesday that in March it would cut more than half a million barrels per day (bpd) more than the deal called for, sending prices surging.
The cuts come alongside involuntary production curbs as a result of US sanctions on Venezuelan and Iranian crude, along with curtailed Libyan output because of civil unrest.
Prices were also buoyed by the partial closure of Saudi Arabia’s Safaniya, its largest offshore oilfield with production capacity of more than 1 million bpd.
The shutdown occurred about two weeks ago, a source said, and it was not immediately clear when the field would return to full capacity.
Market
“The market may be reconnecting with its fundamentals, specifically the several major supply chokeholds that have stacked up in recent months over and above the voluntary OPEC output restraints,” said analyst Vandana Hari of Vanda Insights.
Bank of American Merrill Lynch said in a note that it expects a drop of 2.5 million bpd in OPEC supply in the fourth quarter of 2019 from a year earlier.
However, the global supply picture remains uncertain.
US oil production is on the rise, while the seizure of Libya’s main oilfield by Eastern armed forces this week could soon lead to its reopening.
But reduced exports from Venezuela and Iran have helped to tighten global supply and security threats could threaten Nigerian production after general elections this weekend.
“Looking ahead, the prognosis for Venezuela and Iran remains skewed to the downside. As such, they should continue to act as important pillars of price support. The same, however, can’t be said for Libya,” said Stephen Brennock of oil broker PVM.
“This risks throwing a spanner in the works for OPEC’s rebalancing ambitions and, therefore, the price recovery.”
Faltering global economic growth is also a concern, with signs of a slowdown now abundant in Europe, Asia and the United States, which could lead to slowing growth in fuel demand.
Meanwhile, the US dollar dropped on Friday after San Francisco Federal Reserve Bank President Mary Daly suggested the central bank may hold off on raising interest rates in 2019, bolstering risk appetite in the currency market.
Rates
The Fed probably will not need to raise rates this year, given a slowdown in economic growth and muted inflation, Daly told the Wall Street Journal in an interview published on Friday.
“If the economy evolves as I just said I expect it to – 2 percent growth, 1.9 percent inflation, no sense that (price pressures are) going up, no sense that we have any acceleration – then I think the case for a rate increase isn’t there” this year, the paper quoted Daly as saying.
The dollar index, which measures the currency against a basket of six rivals, was about 0.1 percent lower at 96.901, after a week that included several weak data reports, including dismal US retail sales.
“All of this looks like a positive risk tone in markets on dovish Fed comments from Daly which go further than what other Fed speakers have said,” said Richard Franulovich, senior currency strategist at Westpac Banking Corp. “That I think is what has undermined the dollar and pulled the euro up.”
The fall in the dollar drove the euro up from a three-month low hit earlier in the day, erasing all of its earlier losses, approaching the end of the day 0.05 percent stronger against the dollar at $1.129.
“The dollar was bid this morning and Europe touched threemonth lows,” said Franulovich. “But all that is in the past now.”
The euro fell Friday morning after Benoit Coeure, a member of the European Central Bank’s executive board, said a new round of cheap multi-year loans to banks was possible. Coeure added that the euro zone’s recent economic slowdown is more pronounced than earlier expected, suggesting the path of inflation will also be more shallow.
In spite of some recovery on Friday, the currency was nevertheless headed for a second week of losses and was down 1.77 percent year to date.
The results of a meeting on Friday between US Treasury Secretary Steve Mnuchin and Chinese President Xi Jinping is also in focus for foreign exchange investors.