Oil prices are on track for strong gains this week, and the price increases are not only the result of the crisis in Venezuela.
The oil market received a boost from the U.S. Federal Reserve this week, which signaled on Wednesday that it would essentially suspend its plans to hike interest rates this year. Fed chairman Jerome Powell said that economic growth remained “solid” but that the central bank had “the luxury of patience” when deciding on further rate hikes. That is a big change from prior guidance, in which the Fed very clearly outlined multiple rate increases in 2019.
“The case for raising rates has weakened somewhat,” Powell said. Slowing growth in China and Europe, a weakening housing market, tepid inflation – these are not exactly the ingredients that call for aggressive rate tightening.
The announcement contributed to strong gains for oil prices on Wednesday and Thursday. At the time of this writing, WTI was trading in the mid-$50s, with Brent above $62 per barrel, both close to two-month highs.
A more dovish position from the Fed boosts the bullish case for oil in two ways. First, lower-than-expected interest rates will provide a jolt to the economy. Stock markets rose on the news. But second, a softer rate outlook also undercuts the U.S. dollar a bit. A weaker dollar stokes crude oil demand in the rest of the world, and historically the dollar has had an inverse relationship with oil prices.
Meanwhile, the oil market received a more direct boost this week on news that Saudi Arabia slashed shipments to the United States. The U.S. has the most transparent and up-to-date data on the oil market, which include weekly releases on production levels, imports and exports, and inventories. That kind of visibility is not readily available in most places around the world. Related: Did Russia Make A Secret Nuclear Energy Deal With North Korea?
As a result, Saudi Arabia appears to be deliberately targeting that data. By reducing shipments to the U.S. specifically, Riyadh can help create the appearance of a tightening oil market. Saudi shipments to the U.S. dropped by 528,000 bpd last week to just 442,000 bpd, the lowest weekly total in more than two years.
More to the point, OPEC’s production declined by 890,000 bpd in January, according to a Reuters survey, the largest monthly decline since early 2017 (the month that the first round of OPEC+ production cuts took effect). Iraq produced above its production ceiling, but aside from that, the cartel is well on its way to implementing the production curbs.
In fact, there is suddenly a remarkable confluence of events pushing oil in a bullish direction. First and foremost are the OPEC+ production cuts of 1.2 mb/d that are phasing in. But beyond that, U.S. shale is starting to slowdown, and while output is still expected to grow this year, the increase could be the smallest in years.
Then there are the supply outages. Libya lost some output unexpectedly in December, with some of its production still offline. Iran sanctions waivers are set to expire in May, and the U.S. hopes to further cut into Iranian oil exports. The new sanctions on Venezuela threaten to create yet another major source of supply outages. Related: EU Still Aims To Circumvent U.S. Sanctions On Iran
In fact, when considering that OPEC+ is determined to keep 1.2 mb/d of supply off of the market, and painful U.S. sanctions on Venezuela and Iran threaten to shut in even more output, it’s pretty amazing that Brent crude is only trading at $62 per barrel. The Fed backing off interest rate hikes is the cherry on top.
Traders and investors are starting to wake up to this bullish sentiment. “The market is more convinced that there will be aggressive production cuts and the macro picture has improved a bit. That’s positive for prices going forward,” Jean-Louis Le Mee, CEO of London-based oil hedge fund Westbeck Capital, told the Wall Street Journal.
Another investor echoed that sentiment in comments to the WSJ. “The Saudis are sincere about higher oil prices, they need to balance their budget. The OPEC cuts will lower stocks so I’m pretty bullish,” said Mark Gordon, portfolio manager at the Ascent Oil Fund.
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Oil prices are back up to where they were in November, and significant outages from Venezuela in the short run could pave the way for more price increases.
By Nick Cunningham for Oilprice.com
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The decision by the US federal Bank to suspend any plans to hike interest rates this year removes an adverse impact on global oil demand. Moreover, the OPEC+ cuts of 1.2 million barrels a day (mbd) bolstered by Saudi Arabia’s slashing its oil exports to the US are starting to do the trick of re-balancing the global oil market.
However, one bearish factor is still at play in 2019. It is the realization by the global oil market that US sanctions on Iran have so far failed to cost Iran the loss of even one single barrel of oil and therefore there is no risk of a supply deficit in the market.
Moreover, the United States has no alternative but to renew the sanction waivers it granted to eight countries in November last year when they expire in May this year or issue new ones if only for the Trump administration to use them as a fig leaf to mask the fact that their zero exports option is out of reach and that the sanctions are doomed to fail.
Furthermore, claims by Brian Hook, the State Department’s special representative for Iran that Iran’s oil exports had fallen to around 1 million barrels per day (mbd), down from the 2.7-mbd peak from last year are self-delusion. Iran’s oil exports never reached 2.7 mbd. They only averaged 2.125 mbd according to the authoritative 2018 OPEC Annual Statistical Bulletin.
As for events in Venezuela, the global oil market has so far been unmoved by the US sanctions. Whatever oil Venezuela exports to the US estimated at 500,000 b/d can easily be diverted to China and India. 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.
Venezuela can easily replace imports of a diluent needed for blending with its extra-heavy oil from the United States with imports from China, Russia and Iran.
It is possible that US sanctions against Venezuela are doomed to fail as sanctions on Iran failed.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London