Oil Prices Near Three-Month High As Market Tightens

It came as no surprise whatsoever to me that Brent crude has surged above $66 a barrel. In November last year Brent crude hit $87. The same fundamentals that underpinned oil prices in November are still at play today. Therefore, I expect oil prices to go beyond $80 this year. I hasten to add that the current surge in oil prices has nothing to do with US sanctions on Iran and Venezuela.

At last bullish influences in the global oil market are starting to assert themselves strongly.

The first bullish influence is the strict adherence by OPEC+ to the agreed production cuts and Saudi Arabia’s intention to implement deeper production cuts from March this year to ensure prices rise beyond $80 a barrel being the price Saudi Arabia needs to balance its 2019 budget.

Another bullish factor at play now is that the global oil market casting aside claims by the US Energy Information Administration that US oil production will average 12.4 million barrels a day (mbd) in 2019 compared with 10.9 mbd in 2018 and averaging 13.2 mbd in 2020. The market is starting to realize that US oil production in 2019 and beyond is going to be slowing down fast particularly after the many authoritative reports speaking of a slowdown in the Permian. The bulk of US shale oil production has recently been coming from the Permian particularly after the decline of both the Bakken and the Eagle Ford shale plays in 2016. The Permian is projected to flatten by 2020 with growth slowing down from 860,000 barrels a day (b/d) in 2018 to a mere 230,000 b/d barrels by 2020 to OPEC (2018 World Oil Outlook). Such developments definitely argue against any pronounced rise in US oil production in 2019 and beyond. An eventual plateau in Permian oil supply will have profound implications for long term oil prices.

A third bullish influence is that representatives of the world’s two largest economies will be meeting in Washington this week for another round of trade talks and the markets, including the oil market, are currently banking that the worst of a trade war could be averted and some sort of deal could be reached.

A fourth influence is that China’s imports and exports rose faster than expected in January dispelling unfounded fears about a slowdown in the Chinese economy. Moreover, China’s oil imports continue to rise robustly projected to exceed 11 mbd.

As for US sanctions on Iran, the Trump administration has no alternative but to renew the sanction waivers it issued to eight countries buying Iranian crude or issue new ones when they expire in May if for no reason than to use them as a fig leaf to mask the fact that its sanctions have so far failed to cost Iran even a single barrel of oil and that its zero exports option is not within reach.

The reason the global oil market was unmoved by US sanctions on Venezuela is that Venezuela’s exports of 500,000 b/d to the US can be redirected to China, India and the European Union (EU). India said it will continue to buy Venezuelan crude despite US National Security Adviser John Bolton’s warning to countries of the world not to buy Venezuelan oil. India is one of the main buyers of Venezuelan crude to the tune of 400,000 b/d.
Furthermore, these sanctions will hardly impact on the global oil market and prices unless there is a complete collapse of Venezuela’s oil industry as a result of a general strike by workers of the National Oil Company of Venezuela, PDVSA, or a civil war.

Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London