Oil prices reach 3-month high as OPEC output falls

Output by the Organization of the Petroleum Exporting Countries (OPEC) has fallen sharply over the past two months to its lowest level in four years. (Reuters)
Updated 26 February 2019
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Oil prices reach 3-month high as OPEC output falls

  • The US crude oil inventory build could not push oil lower
  • Brent seems to have moved back above $70 per barrel amid a tight market

RIYADH: Oil prices continued to rise slowly for a second consecutive week, reaching a three-month high. The US crude oil inventory build could not push oil lower. Brent seems to have moved back above $70 per barrel amid a tight market.
Output by the Organization of the Petroleum Exporting Countries (OPEC) has fallen sharply over the past two months to its lowest level in four years, to 30.8 million barrels per day (bpd) in January, causing any oil surplus to disappear. This might move the oil market into a deficit toward the end of the first quarter.
By the weekend, Brent crude rose to $67.12 per barrel and WTI rose to $57.26 per barrel. The Brent / WTI spread remains wide at $9.86 per barrel. The wide spread helps traders to hedge US crude oil exports that help increase the flow heading East.
This is the reason behind US exports jumping to above 3 million bpd in the last two weeks. The Energy Information Administration (EIA) reported US crude output at 12 million bpd for the first time last week, up from 11.9 million bpd the week prior.
The surge in US crude oil exports has brought stronger competition for West African light sweet crudes heading to the Asian market, as the arbitrage economics remain highly favorable for more US crude purchases, especially with lower freight costs to Asia that have fallen by about a third since early December 2018, S&P Platts Global reported.
OPEC output cuts kept Dubai crude relatively expensive amid medium / heavy sour crude tightness in the market. This supply tightness pushed Dubai crude’s discount to Brent to narrow to a record low in January and early February.
However, the Dubai benchmark moved steadily higher and reached a premium of $0.20-$0.30 per barrel to Brent by mid-February. This has led to robust trading activities in the physical market amid tightening medium / heavy sour crude oil supplies, which was further tightened after the loss of the heavier Venezuelan grades that made heavy crudes priced more competitively.
Global refiners already suffer from poor refining margins for naphtha and gasoline (the light ends of a crude barrel), while rising US production puts more light sweet crude oil in a global market that is already saturated with these crude supplies, necessitating refineries worldwide to sweeten their blends as much as they can economically handle.
Since the global market is already soaked with gasoline and naphtha refined products, that is depressing refining margins, while refiners are having to pay more to secure supplies of the medium / heavy sour crudes. The constrained medium / heavy crude market has supported fuel oil prices that have escalated, while its inventories are at low levels, especially for high-sulfur fuel oil.

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


Oil near 2019 highs on OPEC supply cuts, US sanctions

OPEC scrapped its planned meeting in April, effectively extending supply cuts that have been in place since January until at least June, when the next meeting is scheduled. (Reuters)
Updated 10 min 41 sec ago
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Oil near 2019 highs on OPEC supply cuts, US sanctions

  • OPEC scrapped its planned meeting in April, effectively extending supply cuts that have been in place since January until at least June, when the next meeting is scheduled

SINGAPORE: Oil prices were near 2019 highs on Tuesday, supported by supply cuts led by producer club OPEC.
US sanctions against oil producers Iran and Venezuela are also boosting prices, although traders said the market may be capped by rising US output.
US West Texas Intermediate (WTI) futures were at $59.10 per barrel at 0314 GMT, virtually unchanged from their last settlement and close to the 2019 high of $59.23 reached the previous day.
Brent crude oil futures were up 10 cents at $67.64 per barrel, also close to this year’s peak of $68.14 reached late last week.
In China, Shanghai crude futures, launched in March last year, bounced 4.5 percent from their last close to 467.6 yuan ($69.64) per barrel, also near 2019 highs of 475.7 yuan a barrel reached during a brief spike in February.
In dollar-terms, this pushed Shanghai crude into a premium over Brent.
The Organization of the Petroleum Exporting Countries (OPEC) on Monday scrapped its planned meeting in April, effectively extending supply cuts that have been in place since January until at least June, when the next meeting is scheduled.
OPEC and a group of non-affiliated producers including Russia, known as OPEC+, started withholding supply to halt a sharp price drop in the second-half of 2018, when markets came under pressure from surging output as well as an economic slowdown.
“The OPEC+ deal has brought stability to crude prices and signs of an extension have taken crude higher,” said Alfonso Esparza, senior market analyst at futures brokerage OANDA.
Prices have been further supported by US sanctions against oil exports from Iran and Venezuela, traders said.
Because of the tighter supply outlook for the coming months, the Brent forward curve has gone into backwardation since the start of the year, meaning that prices for immediate delivery are more expensive than those for dispatch further in the future, with May Brent prices currently around $1.20 per barrel more expensive than December delivery Brent.
Outside OPEC, analysts are eyeing US crude oil production, which has soared by more than 2 million barrels per day (bpd) since early 2018, to around 12 million bpd, making America the world’s biggest producer ahead of Russia and Saudi Arabia.
Weekly output and storage data will be published by the Energy Information Administration (EIA) on Wednesday.
On the demand-side, there is concern that an economic slowdown will erode oil consumption.
Bank of America Merrill Lynch said in a note that economic “risks are skewed to the downside” and that “we forecast global demand growth of 1.2 million bpd year-on-year in 2019 and 1.15 million bpd during 2020.”
The bank said it expected “Brent and WTI to average $70 per barrel and $59 per barrel respectively in 2019, and $65 per barrel and $60 per barrel in 2020.”