Volatility in oil prices casts shadow over 2019 outlook 

Speculators have cut back their previous short positions in Brent futures and extended their long positions(AFP file photo)
Updated 13 January 2019

Volatility in oil prices casts shadow over 2019 outlook 

  • The change in speculative flows marks a reversal from last month’s gloomy activities

RIYADH: Oil prices rebounded to their highest level in a month, the Brent crude price rose back above the psychological level of $60 per barrel in the longest rally since 2017, and WTI increased to $52.59 per barrel. The Brent / WTI spread narrowed to $7.41 per barrel. 

Oil market sentiment went from extreme bearishness to extreme bullishness in less than a month. This short cycle disconnects the oil market from earlier bearish sentiments driven by other commodity markets, which had broader support from equity markets. Noticeably, equity markets are still down from a year ago but are steadily clawing back gains.

Speculative short positions over the past two months that took the Brent crude price down to a 16-month low at $50 per barrel amid bearish momentum, and neglected bullish sentiments, proved a huge disconnection from the physical market fundamentals. 

Market sentiments have changed lately, with banks and hedge funds trading oil futures and options while removing new bets from falling oil prices, changing back into rising oil price bets. Consequently, speculators have cut back their previous short positions in Brent futures and extended their long positions. 

This change in speculative flows marks a reversal from last month’s gloomy activities, after tireless efforts to exit bullish oil positions with limited buying interest. Yet some speculators are still cautious in betting on prices’ upward movement. 

Apparently crude oil is back to a bull market, with prices on an upward momentum since the start of 2019. However, the World Bank expects trade tensions to slow global economic growth to 2.9 percent in 2019 from 3 percent in 2018. The divergence from any possible global economic slowdown and oil demand growth has been widely realized by market participants. 

The potential end of the US-China trade war is not adding to oil’s momentum, as demand growth is still upbeat and bull market confidence grows over the global economy and the upcoming tight oil market amid signs of OPEC+ compliance to the new output cuts. The first signs of supply/demand tightening are nonetheless starting to filter in, with dwindling oil tanker freight rates.

The impact of low oil prices in 2015-2016 on upstream investment, which resulted in huge CAPEX cuts, has eventually shown its first signs in the lowest forecasts for Norway’s oil output in three decades.

Extreme oil price volatility in late 2018 has also cast some doubt on oil producers’ capital spending plans in 2019, with Brent now hovering around $60 per barrel after reaching $86 in October.

Norway’s oil output decline was expected to start from mid-2020. But its oil production continues to decline faster than expected due to matured oil fields that caused uncertainty in production forecasts, led by lower upstream investments and a lack of new discoveries to offset any output fall. Norway’s crude oil production currently stands at around 1.3 million barrels per day (bpd), down from 1.5 million bpd a year ago.

  • Faisal Mrza is an energy and oil marketing adviser. He was formerly with the OPEC and Saudi Aramco. Twitter:@faisalmrza

 


Oil up after drone attack on Saudi field, but OPEC report caps gains

Updated 27 min 25 sec ago

Oil up after drone attack on Saudi field, but OPEC report caps gains

LONDON: Crude oil prices rose on Monday following a weekend attack on a Saudi oil facility by Yemen’s Houthi militia and as traders looked for signs of progress in US-China trade negotiations.
Price gains were, however, capped to some degree by an unusually downbeat OPEC report that stoked concerns about growth in oil demand.
Brent crude, the international benchmark for oil prices, was up 85 cents, or about 1.4%, at $59.49 a barrel at 1225 GMT.
US West Texas Intermediate (WTI) crude futures were up $1.01, or 1.8%, at $55.88 a barrel.
A drone attack by the Iran-backed Houthi militia on an oilfield in eastern Saudi Arabia on Saturday caused a fire at a gas plant, adding to Middle East tensions, but state-run Saudi Aramco said oil production was not affected.
“The oil market seems to be pricing in again a geopolitical risk premium following the weekend drone attacks on Saudi Arabia, but the premium might not sustain if it does not result in any supply disruptions,” said Giovanni Staunovo, oil analyst for UBS.
Iran-related tensions appeared to ease after Gibraltar released an Iranian tanker it seized in July, though Tehran warned the United States against any new attempt to seize the tanker in open seas.
Concerns about a recession also limited crude price gains.
Meanwhile, China’s announcement of key interest rate reforms over the weekend has fueled expectations of an imminent reduction in corporate borrowing costs in the struggling economy, boosting share prices on Monday.
US energy firms this week increased the number of oil rigs operating for the first time in seven weeks despite plans by most producers to cut spending on new drilling this year.
“WTI in recent weeks has performed relatively better than Brent... Pipeline start ups in the United States have been supportive for WTI, while the ongoing trade war has had more of an impact on Brent,” said Warren Patterson, head of commodities strategy at Dutch bank ING.
The Organization of the Petroleum Exporting Countries (OPEC) cut its forecast for global oil demand growth in 2019 by 40,000 barrels per day (bpd) to 1.10 million bpd and indicated the market would be in slight surplus in 2020.
It is rare for OPEC to give a bearish forward view on the market outlook.
“Such a bearish prognosis will heap more pressure on OPEC to take further measures to support the market,” said Stephen Brennock of oil broker PVM.