Oil Rises, But Kemp Makes Case For Lower Prices

Tuesday June 4, 2019

A global rally in stock markets gave crude prices a modest boost on Tuesday, one day after analysts forecast the rapid development of a bearish market for the commodity - but at least one expert has come out in defense of lower prices, arguing that they have helped balance supply and demand.

John Kemp, commodities analyst for Reuters, pointed out on Tuesday that "Lower oil prices are starting to rebalance the oil market by slowing the rise in U.S. crude output and encouraging Saudi Arabia and its allies to extend production cuts through the end of 2019."

He added that "Falling prices since the start of the fourth quarter, renewed since the end of April, have slowed the rate of new drilling and fresh well completions in the major shale plays," with the number of rigs falling to just 800 at the end of May, down by almost 10 percent from a current-cycle peak of 888 in November 2018.

Kemp went on to note that the full impact of recent crude prices declines will "continue to filter through into slower production growth in the second half of 2019 and into the first part of 2020" - and compel the Saudis and the Organization of the Petroleum Exporting Countries (OPEC) to extend their output cuts for the second half of 2019.

Kemp also argued that prices have fallen "to adjust to the increased risk of a recession biting into expected consumption later in the year and early 2020."

Kemp's thinking is firmly based in fundamentals at a time when sentiment is the driving force for crude traders; and as such, the rally of world stocks based on the expectations of a cut in U.S. interest rates also caused Brent on Tuesday to settle 69 cents higher at $61.97 per barrel, and West Texas Intermediate to rise 23 cents to $53.48 per barrel.

Unsurprisingly, experts viewed the gains as fleeting and worried that crude will soon resume its downward trajectory.

Jim Ritterbusch, president of Ritterbusch and Associates, said in a note, "As long as U.S. tariff issues with China and Mexico remain unresolved and a broad based 5 percent tariff is placed on Mexico next week, speculative liquidation out of the oil space could be sustained."

It also seems that the question of whether crude supplies are in surplus or tightening will be hotly debated in the days to come: Refinitiv Eikon data released Tuesday showed that the U.S. sanctions against Venezuela have caused PDVSA's exports of crude and refined products fell 17 percent in May from the previous month to 874,500 barrels per day (bpd), due to problems sellingĀ  upgraded crude that used to be bought by U.S. refiners.

While this disclosure presumably supports critics who worry about market tightening, on the other side of the coin Igor Sechin, head of Rosneft, echoed the sentiment of many colleagues by declaring on Tuesday that Russia should abandon its cutback commitments and pump at will; he also said he would seek government compensation if the OPEC cuts are extended.