Economists have jacked up the projection for U.S. light crude to average $60.23 per barrel in 2019 from a $58.92 forecast in March in the second and most bullish upwards revision since the beginning of the year.
The verdict was rendered by 31 economists in Reuters latest monthly survey, and it forecasts that oil prices are likely to stay elevated for the rest of the year as OPEC output curbs and an end to waivers on Iranian oil are expected to keep supply tight.
For Brent crude, the experts have forecast and average $68.57 a barrel in 2019, an improvement on the March poll forecast of $67.12.
The majority of polled analysts expect OPEC cuts to be extended till the end of the year, even though they expect the group to increase production to compensate for lower output in Iran and Venezuela.
Meanwhile, Frank Schallenberger, head of commodity research at LBBW, told Reuters that the decision by the US to remove waivers for Iranian oil is likely to remove another 0.5-1 million barrels per day from the market, thus making supply even tighter.
Oil has rallied about 40 percent this year buoyed by a deal by OPEC and other leading producers to curb output.
OPEC vs. Shale
There’s a possibility that prices could ratchet even higher if OPEC fails to fully anticipate falling output elsewhere.
Harry Tchilinguirian, strategist at BNP Paribas, says there’s a real risk of supply overtightening if OPEC and NOPEC allies led by Russia fail to make allowances for unplanned outages in Iran and Venezuela, but instead decide to roll over the existing cuts when they meet again in Vienna in June. Related: High-Cost Oil Faces Existential Risk
On the flipside, countries like the U.S. will be looking to capitalize on the shortfall.
The United States has been pressuring OPEC to increase output to compensate for reduced supply by the likes of Iran and Venezuela, and is likely to increase its own production. Capital Economics analyst, Caroline Bain, says the elimination of logistical bottlenecks and prevailing high prices are likely to encourage more U.S. drilling.
Indeed, according to the U.S. Energy Information Administration (EIA), U.S. crude output from the seven major shale formations is likely to climb to 8.46 million bpd in May. Consequently, this is likely to depress prices some, with Brent dropping from $70 per barrel during the second and third quarters of the current year to around ~$69 by year-end.
Output from U.S. shale has doubled over the past five years, and further increases could flood the market. Currently, there’s a tug-of-war between U.S. and OPEC with the former looking to fast-track the approval of the “The No Oil Producing and Exporting Cartels Act 2019” (Nopec) bill that will allow the U.S. to prosecute OPEC for fixing oil prices.
Yet, the bullish oil thesis could still be upset by hedge funds throwing a spanner in the works.
Over the last 10 weeks, hedge funds have been furiously amassing oil futures contracts counting on OPEC exceeding its planned production cuts, Venezuela’s production drying up, Libya’s supply continuing to deteriorate, and global oil demand growth continuing unabated. While these factors remain valid for now, net long positions in WTI and Brent are looking too bullish, thus increasing the risk of a crash if oil prices start dropping or some fund managers begin to take profits.
Data by Reuters market analyst John Kemp shows that as of April 23, long positions in WTI Crude and Brent Crude held by hedge fund and other money managers outnumbered shorts in a ratio of 11:1. The last time bullish positioning was that stretched was back in October 2018 around the time prices began a descent before eventually crashing 40 percent by the end of the year.
By Alex Kimani for Oilprice.com
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Based on current fundamentals in the global oil market such as a strong global oil demand adding 1.45 million barrels a day (mbd) this year over 2018, rock solid Chinese oil imports projected to hit 11 mbd this year, a Chinese economy growing at 6.4% this year beyond the projected 6.3%, a confirmed slowdown in US production and a tightening global oil market caused by OPEC+ production cuts, oil prices could be headed to $80 a barrel or even higher this year. So it is a case of my projected figure versus theirs.
Still, the end of US sanction waivers will have very negligible impact on oil prices and global oil supplies in the long term for three reasons.
The first is that US sanctions against Iran’s oil exports have so far failed to reduce Iran’s oil exports. The second reason is that the eight largest buyers of Iranian crude oil who were given US sanction waivers last November with the exception of South Korea and Japan will continue to buy Iranian crude with or without waivers.
The third reason is that without waivers, Japan and South Korea which account for 14% of Iranian oil exports may stop importing some 300,000 b/d. However, this will be more than offset by increased purchases from China, India and Turkey.
Saudi Arabia is not going to raise its oil production until it is sure that Iranian oil exports are actually falling and that the global oil market is irrevocably re-balanced and oil prices are headed to $80 a barrel or higher being the price it needs to balance its budget. It may even consider extending the production cuts deal until the end of the year if it deemed that the global oil market has not irrevocably re-balanced.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London