Oil up on market rebalancing, but analysts warn OPEC must keep supply cuts

Brent has risen by 37 percent since its low in 2017 reached last June. (Reuters)
Updated 03 November 2017
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Oil up on market rebalancing, but analysts warn OPEC must keep supply cuts

SINGAPORE: Oil markets rose on Friday, supported by OPEC-led supply cuts which are tightening the market as well as by strong demand, but analysts cautioned that the cuts would need to be extended to counter rising US output.
Brent futures, the international benchmark for oil prices, were at $60.86 per barrel at 0524 GMT, up 24 cents, or 0.4 percent, from their last close. Brent has risen by 37 percent since its low in 2017 reached last June.
US West Texas Intermediate (WTI) crude was at $54.83 a barrel, up 29 cents, or 0.5 percent, from the last close. WTI is 30 percent above its 2017-low in June.
The bullish market sentiment has been fueled this year by the Organization of the Petroleum Exporting Countries (OPEC) and other producers, including Russia, to hold back 1.8 million barrels per day (bpd) in oil production to tighten markets.
While supplies are being withheld, oil demand is rising, especially in China, whose roughly 9 million bpd of imports has surpassed the US as the world’s biggest crude importer.
“China’s oil demand growth appears to be accelerating,” US investment bank Jefferies said.
Furthermore, global crude inventories, especially in the US, have drawn down as oil markets have been slightly undersupplied during the past quarters, although the outlook for next year is uncertain.
The pact to withhold supplies runs to March 2018, but there is growing consensus to extend the deal to cover all of next year.
Analysts say that without an extension of the cuts, a supply glut could re-emerge, especially due to rising US production.
“Our oil balance numbers imply a modest global drawdown of inventories in 2017, not nearly enough to reverse the large builds seen from 2014 to 2016. What’s more, our balance points to the resumption of global stock builds in 2018,” said Harry Tchilinguirian of BNP Paribas in a note.
Because of that, he said “we see no other option for OPEC and Russia than to agree to an extension of supply cuts past March 2018.”
Tchilinguirian said rising US output, which has jumped by more than 13 percent since middle of 2016 to 9.6 million bpd, was resulting in increased exports.
The Energy Information Administration (EIA) said this week that the latest US crude oil export figures rose a record 2.1 million bpd.
“With the US oil surplus increasingly exported to Atlantic Basin markets and further ashore to OPEC’s hitherto captive markets in Asia, it may be difficult for Brent to hold on to $60 per barrel in 2018,” Tchilinguirian said.
BNP Paribas said it expected WTI and Brent to average $50 per barrel and $55 per barrel, respectively, in 2018.


Lufthansa announces overhaul of budget carrier Eurowings

Updated 24 June 2019
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Lufthansa announces overhaul of budget carrier Eurowings

  • Lufthansa cited falling revenues at Eurowings as a major reason for its warning on full-year profits on June 16
  • Eurowings’ long-haul business would be managed by Lufthansa in the future

BERLIN: Lufthansa on Monday announced a turnaround plan for Eurowings in which the budget carrier will focus on short-haul flights and seek a 15 percent cut in costs by 2022 in the hope of returning to profit.
The German airline cited falling revenues at Eurowings as a major reason for its warning on full-year profits on June 16. Eurowings’ revenue was also forecast to fall sharply in the second quarter.
Lufthansa said its Eurowings fleet would be standardized on the Airbus A320 family and it would seek to boost productivity at Eurowings by limiting itself in Germany to one air operator’s certificate.
Brussels Airlines — the Belgian national flag carrier which Lufthansa took control of in 2016 — would not be integrated into Eurowings, Lufthansa said. A turnaround plan for Brussels Airlines will be announced in the third quarter.
Lufthansa also said it would start pegging its dividend payout ratio to net profit in the future to give the group more flexibility. It would pay out a regular dividend of 20 percent-40 percent of net profit, adjusted for one-off gains and losses.
Lufthansa said Eurowings’ long-haul business would be managed by Lufthansa in the future.
Carsten Spohr, Chief Executive Officer of Lufthansa, said Monday’s announcements sent “a clear signal that this company cares about its shareholders and tries to create value for them.”
Lufthansa said its Network Airlines — made up of Lufthansa, Swiss and Austrian Airlines — would aim to use innovations in sales and distribution to make a contribution to increasing unit revenues by 3 percent by 2022.
Network Airlines will aim to reduce unit costs continuously by 1 to 2 percent annually, the airline said.