Oil Market Roundup - Wednesday Week 2

Wednesday January 9, 2019

Crude trading on Wednesday played out contrary to the way cautious analysts earlier in the week warned that it might, with assurances that Saudi Arabia's oil production and exports are falling sharply causing West Texas Intermediate to surge by $2.58 to $52.36 and Brent to climb $2.55 to $61.27 per barrel.

The more ephemeral but no less reassuring sentiment that the U.S./China trade talks are reportedly moving towards a resolution also helped support prices, despite earlier analytical thought that crude had made too many consistent gains so far in the New Year and was liable for a correction (Wednesday's trading has now caused oil prices to rise by about 17 percent over an eight-day rally).

Khalid al-Falih, energy minister for the Saudis, is credited for bolstering traders, by stating on Wednesday that his kingdom will meet its goal of reducing output to 10.2 million barrels per day (bpd) this month, down about 900,000 bpd from the country's record November output; the Saudis will also export 7.2 million bpd this month and 7.1 million bpd in February.

However, it is unclear to what extent the talks with China and al-Falih's remarks will keep the market buoyed, especially given the U.S. Energy Information Administration reporting that the nation's  inventories of gasoline rose by 8.1 million barrels and distillates stockpiles (including diesel and heating fuel) jumped by 10.6 million barrels (crude stockpiles fell by 1.7 million barrels).

Indeed, early trading on Thursday suggests that worry over rising inventories may be finally having an impact on crude prices, although of course the situation could easily revert back to the positive before the session is over.

Perhaps still rattled by how quickly and sharply crude prices fell in the closing months of 2018, (thus defying near-unanimous analytical sentiments that oil would soon be trading in the triple digits), commodities experts in 2019 continue to downplay the new year rally and reconsider their near-term predictions: Morgan Stanley on Wednesday was the latest analytical body to cut its 2019 oil price forecasts, this time predicting that Brent will average $61 per barrel (down from a previous estimate of $69), and WTI will average $54 per barrel (compared to a prior forecast of $60).

It explained its reassessment by stating, "Balancing the market would require OPEC discipline to continue well into 2020," referring to the Organization of the Petroleum Exporting Countries' new round of production cutbacks.

Analysts also distinguished themselves on Wednesday by recognizing the near-schizophrenic behaviour that has characterized crude trading of late: Matt Sallee, a portfolio manager who helps oversee $16 billion in energy assets for Tortoise, told Bloomberg, "Sentiment went from completely negative a couple of weeks ago to very positive right now; everyone's just focused on the Saudis and they seem quite determined."