Oil Market Roundup - Thursday Week 1

Thursday January 3, 2019

Amid news that the Organization of the Petroleum Exporting Countries (OPEC) is cutting back more production than planned, traders on Tuesday ultimately decided that this outweighed the usual global economic fears, and as a result West Texas Intermediate continued its modest upward rise, this time by 55 cents, or 1.2 percent to $47.09 per barrel.

Brent prices also rose on Tuesday, by 91 cents (1.7 percent) to $55.82 per barrel.

Phil Flynn, senior market analyst at Price Futures Group Inc., accurately summarized the drivers behind Tuesday's trading by remarking, "Oil is flip-flopping on concerns of supply and demand; it's really a battle between the supply situation, which looks to be tightening, versus the possibility that demand will drop off."

However, unlike Monday's crude price gains, which were driven largely by a slight recovery in the stock markets, Tuesday's performance seemed to be the outcome of traders finally taking OPEC's promise to balance supply and demand via its production cuts - however dependable this may be - to heart.

Jason Gammel, an analyst at Jefferies LLC, put a spin on Flynn's remarks by telling Bloomberg television, "We really do need a sustained effort from some of the OPEC producers to take supply out of the market in order for prices to recover; now we're starting to see that."

Bjarne Schieldrop, head of commodities at SEB, said, "The feeling is that OPEC is delivering on cuts" - a reference to a Reuters survey showing that the cartel pumped 32.68 million barrels per day (bpd) in December, down 460,000 bpd from November and the largest month-on-month drop since January 2017.

The biggest chunk of that cut came from Saudi Arabia and amounted to 400,000 bpd; and despite U.S. president Donald Trump urging the kingdom to pump more, not less, in order to keep gasoline prices low for American motorists, it has said it plans to cut back even more this month.

If that proves to be the case, analysts could see OPEC production fall by about 1 million bpd from October levels, according to Sadad al-Husseini, founder of Husseini Energy.

While it's unclear whether this would have any meaningful effect on global inventories that are said to be steadily rising due to American and Russian output as well as production from other sources, presumably it would play a role in supporting crude prices - although as trading patterns for the latter half of 2018 and into the New Year ably demonstrate, sentiment and rationality collide with alarming frequency during the space of every session, rendering even the most considered forecasts unreliable.

It may well be that the stance taken by the Saudis is the most level-headed: it has repeatedly urged others to forget sentiment and focus exclusively on fundamentals, which they believe - as evidenced by their 2019 budget - will result in oil averaging about $80 per barrel this year, as long as the kingdom's production continues at 10.2 million bpd.