After a gloomy start to 2019 and the January slump that saw oil prices fall to the low-US$50s, Brent crude is back on the rise again – at least for now.
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The return of Brent crude to the mid-US$60s range has largely been driven by OPEC’s continued output cuts. OPEC and its allies have actually over-delivered on the cuts with a further 300 000 bpd decline. According to a Reuters survey, the 11 OPEC members bound by the deal managed to achieve 101% compliance with the agreed-upon cuts, up from 70% in January. Saudi Arabia alone produced 130 000 bpd less than in January, whilst Kuwait, the UAE and Iraq also all made significant cuts.1
Adding an interesting geopolitical twist to the proceedings is the fact that these increased cuts have occurred despite US President Donald Trump urging OPEC and its allies to produce more and reduce efforts to raise prices. When questioned by Reuters, sources at OPEC simply said: “We are sticking to the plan.”2 Involuntary cuts also played a part in the production decline. Venezuela’s already ailing output was hit by newly imposed US sanctions on PDVSA. Once a leading global supplier, and despite being blessed with vast natural reserves, Venezuela’s output has fallen significantly as a result of years of mismanagement. Iran also continues to be the subject of US sanctions, which have seen its output fall. Some estimates show that the sanctions on these two countries have taken as much as 2 million bpd of supply off the global market.
Analysts are treating the news of tightening supply with some optimism – a note released by Barclays was quick to point out that: “OPEC exports are off by over 1.5 million bpd since November”, and a spokesperson for Fitch Solutions was quoted as saying that they expected Brent crude to average US$73/bbl this year.3
Another factor driving up prices is the news that the US and China could be close to signing a trade deal that would end the ongoing tariff row between the two economic giants. The disagreement, which had seen heavy tariffs placed on hundreds of goods including solar panels, washing machines, aluminium, airplanes, cars, pork, and soybeans, had been acting as something of a wet blanket on the global economy. The news that this dispute could soon be over has boosted hopes that economic activity will increase and drive further oil demand. Given the current rate of progress, a formal trade deal could be agreed upon by President Trump and President Xi by the end of March.4
All things considered, the signs are looking fairly positive for the upstream sector – challenges still remain, but the silver linings currently outnumber the clouds. As we head into spring, here’s hoping that the signs of new life continue to grow and eventually bloom.
- 'In rebuff to Trump, OPEC oil output drops further in February’ – https://uk.reuters.com/article/uk-oil-opec-survey/opec-oil-output-drops-further-in-february-as-saudi-over-delivers-on-cuts-idUKKCN1QI4GT?rpc=401
- 'Oil climbs on US-China trade deal hopes, OPEC’s deepening supply cuts’ – https://www.cnbc.com/2019/03/04/oil-markets-us-china-trade-opec-in-focus.html