Oil Holds Steady as Worries Build Over Saudi, Russia Split

Tuesday February 19, 2019

Tuesday's crude market performance could accurately be described as a case of same old, same old, with oil continuing its five day winning streak due to optimism over the effectiveness of supply cuts, but the gains tempered by economic worries.

Tuesday also saw speculation that the relationship between two of the Organization of the Petroleum Exporting Countries' (OPEC) biggest allies is on shaky ground - which could influence crude trading moving forward.

Brent slipped 14 cents to $66.36 per barrel after earlier hitting $66.65, close to its 2019 high of $66.83 reached on Monday; West Texas Intermediate settled up 50 cents to $56.09 per barrel, maintaining its high for the year.

Oil remains somewhat range bound due to trader reluctance to take large new positions until the talks between China and the U.S. scheduled to start on Tuesday reach a successful conclusion and the trade war between the two nations finally comes to an end.

To date, the discord has already impacted many crude demand forecasts, with analysts at JBC Energy writing on Tuesday, "Given a continuously uncertain economic picture, our already relatively bearish outlook for 2019 of below 1 million barrels per day in global oil demand growth may be subject to further downwards revisions."

Phil Flynn, senior market analyst at Price Futures Group, observed, "I think the market is looking for an excuse to follow through on the breakout, but there are still a lot of questions surrounding the U.S.-China trade deal."

One of the few certainties with regards to trading is continued unpredictability: Scott Bauer, chief executive officer of Prosper Trading Academy, told media that investors may be more focused on the trade talks for the time being, "But we know all it takes is one tweet or one headline to turn that around, so I don't think that volatility is going to go away any time soon."

Another sure thing is that the compulsion to pump more oil will continue despite the OPEC cutbacks: Peter Botten, managing director of Australia-based Oil Search, told Bloomberg television that "we'll hopefully return to very strong production" and anticipates a breakthrough in development decisions in Alaska, which would help his company "more than double production over the next four to five years."

This is of course in addition to U.S. producers continuing to attempt to expand their market share.

Meanwhile, Torbjorn Soltvedt, principal MENA politics analyst at Verisk Maplecroft, raised the possibility that market discord may occur within the very organization that traders seem to have so much faith in: OPEC.

He stated in a note Tuesday that any end to output coordination between Saudi Arabia and Russia would likely add significant downward pressure on prices, and that "Although our base case is still that Riyadh and Moscow find a compromise to extend the agreement, the pact is now looking more fragile than ever."

The analyst was reacting to the fact that Russia to date has not yet fully fulfilled its promise to cut supply, which in turn has caused speculation that the former Soviet Union may pull out of the OPEC deal entirely.

Soltvedt concluded that he expected the Saudis may even have to settle for "low levels of [Russian] compliance to save the pact."