Crude Achieves 3 Percent Weekly Gain, But Fundamentals Suggest Trouble Lies Ahead

Friday February 22, 2019

Crude prices on Friday maintained the predictable path they have taken of late, with marginal gains and marginal losses driven largely by sentiment combining for what is still a significant market improvement compared to the calamitous losses of the last quarter of 2018.

Supported by hopes that the U.S. and China will soon reach a deal to end their trade war (a notion based almost entirely on rumour and the expected positive rhetoric coming from U.S. president Donald Trump), West Texas Intermediate ended Friday's session 30 cents higher at $57.26 per barrel, its highest closing price since mid-November, and a 3 percent weekly rise.

Brent declined minimally, by 2 cents to $67.05 per barrel - still enough for a weekly gain of about 1.2 percent.

Support for crude was also provided by the Organization of the Petroleum Exporting Countries (OPEC) production cuts, although all-out U.S. crude output is mitigating the cartel's effectiveness: "We see total U.S. crude production hitting 13 million barrels per day [bpd] by year-end, with 2019 averaging 12.5 million bpd," said Citi.

Indeed, the U.S. continues to exert its might in the global energy realm, the latest example being Exxon Mobil Corp. announcing on Friday that it is partnering with Microsoft Corp. to monitor and analyze the vast amounts of data generated by its sprawling array of drilling rigs, wells, pipelines, refineries, and chemical plants, in a bid to boost Permian oil production.

Anish Patel, Exxon's leader on the project, said, "We realized that we have to do something fundamentally different from a technology standpoint to enable us to grow to meet those volumes."

And although OPEC is still providing positive sentiment to traders, the grim reality of its effectiveness was illustrated by Goldman Sachs, which expects non-OPEC supply to grow by 1.9 million bpd this year - more than offsetting the cartel's target cutback of 1.2 million bpd.

In theory, this stark appraisal of fundamentals - which has been noted by other analysts - should have cast more of a bearish chill on traders than it has so far accomplished, but the bulk of analytical attention is still focused on the U.S./China talks, whose successful conclusion they say would bode well for boosting the global economy - and fuel demand.

Helima Croft, managing director and head of global commodity strategy at RBC Capital Markets, told CNBC television's `Squawk on the Street' that a resolution of the trade war would be "very helpful for crude...we see prices for Brent averaging $68 this year; if you get a resolution on the trade story and more problems out of Venezuela, that's positive."