Brent Closes Over $70 as Pundits Predict Premature OPEC Cutback Exit

by Ship & Bunker News Team
Monday January 15, 2018

Once again defying convention analytical wisdom that dictated crude prices would be stuck at $60 or less in 2018, West Texas Intermediate and Brent on Monday climbed despite word of rising U.S. and Canadian drilling activity: the former rose 51 cents to $64.81, and the latter rose 39 cents to $70.26 per barrel - the highest close since December of 2014.

Although Baker Hughes data showing that U.S. energy companies added 10 oil rigs in the week to January 12, taking the number to 752 (the biggest increase since June 2017), and Canadian producers almost doubling the number of rigs last week to 185, experts say crude continues to be supported by tighter fundamentals and geopolitical tension.

Crude's strong showing in turn led to widespread speculation on Monday that the Organization of the Petroleum Exporting Countries (OPEC) will end its output cuts as soon as the remainder of the excess stockpiles are depleted, which some say could be in mid-2018.

That is the contention of Citigroup Inc., Societe Generale SA, and JMorgan Chase & Co., with Ed Morse, head of commodities research at Citigroup, stating, "There could be an agreement over the summer on ramping production back up" in order to discourage rival supply.

Mike Wittner, head of oil market research at Societe Generale, agreed: "They're very close to their goal when they meet next" in June "and they will achieve their goal in the third quarter; so the second half of the year could well be when they start" phasing out the measures.

However, this for the moment is idle speculation: ministers from the United Arab Emirates and Iraq in the past week have insisted OPEC is committed to maintaining the cutbacks to the end of 2018; Russia has repeatedly stated that the market is not as close to being rebalanced as some pundits believe, and indeed the International Energy Agency has indicated  that OPEC's cuts aren't deep enough to reduce inventories at all this year.

Still, all eyes seem to be focused on what OPEC will do next, and Robin Mills, CEO of Qamar Energy, wrote in a Bloomberg guest column that the deal will likely fall apart and prices will slump again in the second half of 2018 when less than robust demand becomes apparent and Saudi Arabia decides not to lose any more market share to rivals: "This prospect makes it clear that OPEC and its allies don't need an exit strategy, but rather a long-term framework to manage restrained production growth; they cannot afford another price slump."

As for Iraq over the weekend calling for the cutbacks to remain, this is "another sign that the market is going to go up," said Phil Flynn, senior market analyst at Price Futures Group Inc.

Only two organizations don't seem to be too worried about the price rally and its influence on OPEC: RBC Capital Markets believes it's premature to expect a further price rise, at least until the market gets a firmer view on the pace of U.S. production growth; and Bank of America Merrill Lynch points out that in order for prices to remain near $70 per barrel, heightened demand momentum needs to continue for the entire year.

The hand-wringing over higher prices seems odd in light of the fact that if $70 oil triggers rampant U.S. production, inventories will increase and prices will decline again; also, as reported last Friday, China is now producing so much fuel that its refiners have turned to exports to find buyers - which both Trifecta and Oanda said was an obvious sign a market correction is forthcoming.