OPEC Once Again Causes Crude Price Rise as Analysts Hunt For New Worries

Thursday February 14, 2019

Once again this week, the Organization of the Petroleum Exporting Countries (OPEC) seemed to regain its cache within media and analytical circles as a force that is averting a potential global glut due to its crude cutback efforts: on Thursday it was cited as one of the main reasons for Brent rising 82 cents to $64.43 per barrel and West Texas Intermediate gaining 51 cents to settle at  $54.33 per barrel.

Thursday's gains were also helped by investor optimism that the U.S. and China may soon resolve their trade dispute.

Bank of America analysts said in a note, "While medium-term trends pose some challenges, we still see a balanced oil supply/demand outlook this year; Brent should average $70 in 2019, helped by voluntary (Saudi, Kuwait, UAE) and involuntary (Venezuela, Iran) declines in OPEC supply."

CNBC noted that crude prices have risen 20 percent so far this year, "driven primarily by the prospect of a decline in oil supply from OPEC and other top exporters such as Russia."

With oil traders seemingly having abandoned their long-gestating fears about global oversupply, and also with the media-hyped U.S./China trade war appearing to be winding down to a low-key conclusion, oil price risks are now shifting to the upside.

That's the contention of John Kemp, commodities analyst for Reuters, who on Thursday wrote that "Crude prices and spreads are being propelled higher by an almost perfect storm of increasing economic optimism (or at least reducing pessimism), OPEC cuts and unplanned supply disruptions."

He added that "Production and consumption risks, concentrated on the downside at the start of the year, have....shifted to the upside in recent weeks; hedge fund positioning could accelerate the rise in prices and shift to backwardation."

The dissertations of experts such as Kemp may leave readers wondering what the analytical community will be satisfied with in regards to crude market developments, and Ziad Daoud, economist for Bloomberg, added to its overall propensity to be dissatisfied with everything by remarking on Thursday that while the oil crash has come and gone, the debt pile it left across the Gulf Cooperation Council states is still growing, leaving the region's energy-dependent economies more vulnerable next time a crisis strikes.

He said, "Gulf economies are more vulnerable to a collapse in oil prices today than during the last rout in 2014; debt is higher, foreign exchange reserves are lower and the chance of pooling resources is smaller....a sharp drop in oil prices could prove more damaging this time around."

Sergey Dergachev, senior portfolio manager at Union Investment Privatfonds, agreed, pointing out that "It will become dangerous for market participants if the debt spiral gets out of control, especially coupled with a collapse in oil prices" and local risks such as questions of political succession; "economic diversification is poor, and it will take lots of time to tackle it."

Bloomberg Economics found that Oman and Bahrain "already have unsustainable debt dynamics," while the outlook is mixed for Saudi Arabia.