Brent Breaks $70/bbl as Producers Suggest Extending Oil Output Cuts into 2020

Friday March 23, 2018

Talk during the latter half of this week about the Organization of the Petroleum Exporting Countries (OPEC) possibly extending its crude production cuts into 2019 once again resulted in market gains, with West Texas Intermediate on Friday settling up $1.58 to $65.88 per barrel and Brent rising $1.55 to a remarkable $70.45 per barrel.

And once again, traders ignored reports that would normally contribute to a troubling fundamentals scenario, case in point being new Baker Hughes data showing the weekly U.S. oil rig count rising by 4 to 804 in total, up 152 rigs from a year ago.

Another concern that seems to have been overplayed by pundits and ignored by traders is geopolitical tension: despite the U.S. and China now fully engaged in a trade war, "global balances are relatively tight at the moment [and] that's enough to amplify relatively small factors," according to Andrew Wilson, head of energy research at BRS Brokers.

Contrary to common analytical consensus of only a few weeks ago that capped crude prices due to rampant U.S. shale production, the growing sentiment now is that oil will likely enjoy more gains in the near-term: "There are sufficient reasons to expect oil prices to strengthen further from here, and we stick with our (Brent) $75 per barrel call for Q3," said Morgan Stanley.

To which Goldman Sachs added that demand and the OPEC cuts have pushed their Brent spot price expectations to $82.50 per barrel by mid-year.

As for the call by Saudi Arabia to extend the OPEC cuts through 2019, which has been characterized as driven by the concern of that country's energy minister to get rid of the lingering global crude glut, Reuters reminded readers that the kingdom "needs high and stable oil prices if it is to succeed in turning the planned share listing of state oil company Saudi Aramco into the world's biggest share sale."

Interestingly, at least one industry insider thinks that even 2019 isn't enough of an extension to get the global market back into proper balance: Leonid Fedun, vice-president of Lukoil, said on Friday that OPEC and Russia should extend oil cuts into 2020 if U.S. oil output keeps booming.

But the main talk on Friday involved dissecting the reasons why futures were up 6.4 percent this week, the biggest weekly gain since July: "We're seeing the Bolton premium being priced in," said John Kilduff, founding partner at Again Capital, referring to U.S. president Donald Trump's recent choice of hawkish John Bolton as national security advisor.

As for Friday's crude prices, Thomas Finlon, director of Energy Analytics Group LLC, bucked the new line of analytical thought about oil's potential to climb higher, by stating, "I think we are at the top of the range; it's reasonable to assume that $70 represents a short-term ceiling for Brent."

While media this week has focused on Khalid al-Falih, energy minister for Saudi Arabia, calling for cutback extensions in order to ensure the end of the global glut, it's worth noting that he also expressed concern that $70 oil is not enough to spur much-needed industry investment to ensure that future global demand is met: he thinks investment is about $1 trillion below what it was before the drop in crude prices.