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Nick Cunningham

Nick Cunningham

Nick Cunningham is an independent journalist, covering oil and gas, energy and environmental policy, and international politics. He is based in Portland, Oregon. 

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Why The Oil Rally Isn’t Over Yet


Crude oil sentiment is shifting in a bullish direction, with OPEC+ cuts and a growing list of serious outages taking supply off of the market.

Saudi Arabia recently signaled that it would slash its production to just 9.8 million barrels per day (mb/d), or about 0.5 mb/d more than required under the OPEC+ deal. That would take Saudi production down to close to a four-year low, a sign that Riyadh is aggressively trying to push up oil prices.

That is significant, especially since Russia is not really carrying its weight. Russia cut output by 42,000 bpd in January, according to Bloomberg, only about one-sixth of its promised 230,000 bpd reduction as part of the deal.

But Saudi Arabia is more than making up for its lagging partner. Meanwhile, the outages in Venezuela could mushroom in the days and weeks ahead. The crisis is fast-moving and the precise amount of oil that is knocked offline will be tricky to gauge, but it’s a safe bet that the losses will mount.

Iran could also add to the supply woes. U.S. Vice President Mike Pence was met with a frosty reception at the Munich Security Conference in recent days, as the Europeans are loath to cooperate on Washington’s “maximum pressure” campaign. Pence had expected several of his lines to be met with applause, but instead they were met with awkward silences.

Nevertheless, U.S. foreign policy has grown much more aggressive in the year since Mike Pompeo became Secretary of State and John Bolton became National Security Adviser. The U.S. still hopes to zero out Iran’s oil exports, although that could prove tricky as the oil market is tightening up.

More recently, an unexpected outage at a Saudi offshore oil field has added to the supply outages. Related: Forget EVs, Detroit's Big 3 Battle For Heavy-Duty Truck Segment

Meanwhile, President Trump appears to be warming up to a trade deal with China. Over the weekend he tweeted “Big progress being made on soooo many different fronts!” in the negotiations with China, which suggests that both sides are eager to dial down the tensions. The March 1 deadline is fast approaching, but the odds of a major hike in tariffs seems to be waning.

All of this is boosting bullish sentiment in crude oil. Major hedge funds and other money managers increased their bullish bets on oil futures at the fastest rate in nearly six months on February 12. “Many of the worries we’ve had about demand have dissipated,” Bart Melek, head commodities strategist at TD Securities in Toronto, told Bloomberg. “That’s convinced people to strap on some risk again.” Brent oil prices are at three-month highs. 

Of course, further gains are not inevitable. “We view the current price rise as exaggerated and see growing correction potential. The fact that oil production in the US is currently rising significantly more sharply than previously expected is being completely ignored at present,” Commerzbank wrote in a note. The EIA recently revised up its forecast for U.S. oil production growth for 2019 by 300,000 bpd, estimating production at 12.4 mb/d for the year. Related: U.S. Biofuel Just Got A Major Bump

The largest downside risks to oil prices can likely be chalked up to a combination of the potential for a global economic slowdown, weaker demand, and rising U.S. supply.

But there is also the risk that Saudi Arabia becomes fed up with non-compliance by Russia, especially if unilaterally cuts are only met with surging U.S. shale supply. Saudi Arabia won’t want to shoulder the burden of balancing the oil market forever. Riyadh is running sizable budget deficits and is turning to the bond markets to fill the gap. If production cuts are not met with higher prices, the pain will grow. “Hence Saudi Arabia will not keep turning the spigots off if it is not succeeding in supporting prices, either because of poor compliance from other OPEC+ members or if US production was to rise enough to pour cold water on their efforts from last Dec’18 decision,” JPMorgan Chase wrote in a note.


For now, Riyadh will want to let this strategy run its course. So far, prices are up sharply this year, offering some evidence that the cuts are working. The supply curbs have already begun to drain off the surplus. Meanwhile, aggressive U.S. foreign policy will also contribute to a tighter oil market.

By Nick Cunningham of Oilprice.com

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  • Mamdouh Salameh on February 19 2019 said:
    Indeed the oil rally isn’t over yet. The reason is that the same fundamentals that pushed oil prices to $87 in November last year are still at play today. Therefore, the rally will continue until the Brent crude price surges beyond $80 a barrel which is the price Saudi Arabia needs to balance its 2019 budget. That explains while Saudi Arabia is steeply cutting its production and exports beyond its share of the agreed OPEC+ cuts.

    After its discredited strategy of flooding the global oil market in the aftermath of the 2014 oil price crash, Saudi Arabia has no alternative but to stick to the OPEC+ cuts and its own steeper cuts because the other alternative is another collapse of the oil price widening its budget deficit and inflicting disastrous damage on its economy.

    And while Russia is slowly cutting its production because of logistical and weather issues, I am convinced that it will abide by the OPEC+ production cuts.

    Bullish influences are now asserting themselves on the global oil market. One influence is the strict adherence by OPEC+ to the agreed production cuts.

    Another is the growing signs that the US and China could be heading towards a settlement of their trade dispute before the March 1 deadline.

    A third bullish influence is that the global oil market is casting aside claims by the US Energy Information Administration (EIA) that US oil production will average 12.4 million barrels a day (mbd) in 2019 compared with 10.9 mbd in 2018 and 13.2 mbd in 2020. The market is starting to realize that US oil production in 2019 and beyond is going to be plateauing 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 steep 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. Such developments definitely argue against any pronounced rise in US oil production in 2019 and beyond with profound implications for long term oil prices.

    A fourth bullish 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.

    Still, there will continue to be some bearish influences at play in the market. One of these influences is that the US has no alternative but to renew the sanction waivers it issued to eight countries buying Iranian crude or issue new ones if for no other 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 the Trump administration’s zero exports option is a bridge to far.

    The other bearish influence is that US sanctions on Venezuela have hardly been felt in the global oil market. The reason is that Venezuela’s exports of 500,000 b/d to the US could be redirected to China, India and the European Union (EU). In fact, India said it will continue to buy Venezuelan crude despite US National Security Advisor 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

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