Although the oil market will remain oversupplied in the first quarter of 2019, the OPEC+ producer cuts will start to work in the second quarter and gradually rebalance the market to the point of Brent Crude hitting $80 a barrel in Q4 2019, according to energy information provider Argus Media.
The market needs time to work through the current oversupply, Azlin Ahmad, editor for crude oil at Argus Media, told CNBC on Monday.
The OPEC+ combined production cut of 1.2 million bpd takes effect in January 2019 for an initial six-month period, with a possible review in April.
According to Argus Media, Brent Crude prices will trade at around $65 a barrel in Q1, some $68 in Q2, in the low $70s in Q3, and breaking above $80 per barrel in the fourth quarter next year, according to Ahmad.
On Monday afternoon at 01:30 p.m. EST, Brent Crude was down 4.42 percent at $51.71, and WTI Crude was trading down 4.41 percent at $43.58, as concerns about slowing economic and oil demand growth persist.
While some banks have drastically cut their oil price forecasts for next year, Swiss bank UBS expects Brent Crude to rebound to $70 and even $80 a barrel over the next 12 months. The head of asset allocation for APAC at UBS, Adrian Zuercher, told CNBC last week that while supply of crude oil was still abundant, this could soon change as the OPEC+ production cuts enter into effect.
While the recent oil price drop suggests many don't believe these cuts will be as effective as the first ones in 2017, Zuercher noted a report by the Wall Street Journal that Saudi Arabia plans to cut more than initially expected, and the fact that Venezuela's production would likely continue downwards as would Iran's under the weight of U.S. sanctions.
By Tsvetana Paraskova for Oilprice.com
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Comments
Still, market facts support a resurgence in oil prices despite the gloom being voiced by the overwhelming majority of analysts and investment banks.
The first market fact is that Saudi Arabia will do whatever it takes to get oil prices above $80 a barrel since it wants to avoid another ordeal like the one that followed the 2014 oil crash and also because it needs an oil price higher than $80 to balance its budget. This means that it will be prepared to cut its production drastically in support of oil prices.
The second fact is that it normally takes a few months before the recently-agreed cuts by OPEC+ filter into the global oil market.
A third fact is that the global oil demand is projected to add 1.4 million barrels to the oil market in 2019.
A fourth fact is that the global economy is projected to grow by 3.8% in 2019 compared to 3.9% in 2018.
A fifth fact is that the trade war between China and the US has not dampened in any way China’s thirst for oil with Chinese oil imports already rising above 10 mbd and possibly hitting even 11 mbd.
A sixth fact is that the US manipulates oil prices by falsifying claims about rising US oil production and significant build-up in US crude and products inventories and hiking the value of the US dollar opposite other currencies. To put an end to this malpractice, OPEC members are well advised to cut all their oil exports to the US estimated at 4.7 mbd which have been augmenting US crude oil inventories. They should also adopt the petro-yuan in preference to the petrodollar since 80% of their oil exports go to the Asia-Pacific region particularly China.
Based on the above, I am convinced that bullish sentiments in the market will eventually prevail early in 2019 enabling prices to resume their surge.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London