Hoping to drive oil prices back up to $80 per barrel, Saudi Arabia is preparing deeper production cuts this month.
Saudi Arabia plans on lowering oil exports to 7.1 million barrels per day by the end of the month, according to the Wall Street Journal. The Saudi budget does not breakeven unless Brent crude prices average in the mid-$80s per barrel, vastly higher than today's spot price. The WSJ reports that Saudi Arabia plans on cutting exports 800,000 bpd below November levels, which appears to be a larger reduction than required as part of the OPEC+ agreement.
The news helped push up crude oil prices on Monday. "The market has jumped all over that," John Kilduff, founding partner at energy hedge fund Again Capital, told CNBC. The Saudis are "just being aggressive about trying to clean up the situation they fell into from oversupplying the market based on the fear of Iran sanctions," he said.
WTI and Brent were each up 2 percent during midday trading, with WTI closing in on $50 per barrel and Brent jumping above $58 per barrel. Both benchmarks have rallied more than 16 percent since hitting a low point in late December. "Momentum is coming back into the market from very depressed price levels," Petromatrix strategist Olivier Jakob said, according to Reuters. "We've had five consecutive days of price gains already, so what you have today is a continuation of that." Related: Canada's Natural Gas Crisis Is Being Ignored
A few other factors are contributing to the nearly two-week rally. The softer tone from the U.S. Federal Reserve last week buoyed global equities, reducing fear that steadily tightening monetary conditions would push the global economy into recession. Meanwhile, the U.S. and China resumed trade negotiations this week, widely seen as a small sign of a thaw in the trade war. With both countries already starting to suffer from the effects of the trade war, there is pressure on both governments to reach an accord. If the worst can be avoided, there is a lot more room to the upside for crude prices, particularly since oil traders have grown pessimistic about the fate of the global economy. "The oil market is still pricing-in a sharp slowdown in global growth despite our economists' forecast for resilient growth and robust late-2018 oil demand data," Goldman Sachs wrote in a note on January 6. "Absent such a large slowdown, we expect prices to recover further, although growth uncertainty will likely require strengthening physical oil markets to drive this rally, with encouraging evidence that the OPEC cuts are starting."
Indeed, the oil market is already tightening up relative to the outlook in December when prices dropped to 18-month lows. Saudi Arabia already slashed output by 400,000 bpd in December compared to a month earlier, and news that they will essentially cut another 400,000 bpd in January is raising expectations of a tighter market.
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"If compliance by OPEC and the allied non-OPEC countries is similarly high as in the agreement two years ago, the oil market is likely to be rebalanced during the first half year," Commerzbank wrote in a note on Monday. "Less sharply rising US oil production may also play its part in this. According to Baker Hughes, drilling activity at least dropped noticeably in the last reporting week, doubtless as a result of the recent low prices."
With the OPEC+ cuts now phasing in, the supply glut that blew up the market in November and December could start to ebb. To be sure, there is not a consensus on this point. Some analysts see the OPEC+ cuts as coming up short relative to what is needed to balance the market. Nevertheless, the outlook appears dramatically tighter than it did in December.
WTI is now close to moving back above $50 per barrel, and could be heading higher if Saudi Arabia goes beyond what it committed to in Vienna. Most investment banks see strong price gains in 2019, even if many of them do not see WTI and Brent returning to the highs seen last October.
By Nick Cunningham of Oilprice.com
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Nick Cunningham is an independent journalist, covering oil and gas, energy and environmental policy, and international politics. He is based in Portland, Oregon. More
Comments
With relatively huge budget deficit and dwindling financial reserves, Saudi Arabia needs an oil price far higher than $80 a barrel to balance its budget.
That is why Saudi Arabia is determined to ensure that the recently-agreed OPEC+ cuts amounting to 1.2 million barrels a day (mbd) will do the trick and reduce the glut in the market. The Saudis have signalled to the global oil market their determination to defend oil prices by cutting an estimated 639,000 b/d from its exports in December 2018. Moreover, there is evidence that Saudi Arabia is prepared to do deeper production cuts and even cut exports 800,000 b/d below November levels, which appears to be a larger reduction than required as part of the OPEC+ agreement.
After a spate of bearish trends since October last year, oil is at last starting the year with some bullish news sending prices higher. But this is not the end of the story.
Two bullish developments have recently helped push oil prices up. One is the growing feeling in the global economy that the trade war between the US and China could be coming to an end. The other is a widely reported slowdown in US shale oil production.
And despite bullish tail winds pushing oil prices up, a bearish element may still be at play in 2019, namely the failure of US sanctions to cost Iran the loss of even one barrel from its oil exports leading the global oil market to realize that there will not be a supply deficit in the market.
Moreover, US sanction waivers which were issued to eight countries in November last year will most probably be renewed in May this year if only to be used by the Trump administration as a fig leaf to mask the fact that their zero oil exports option is out of reach and that the sanctions are deemed to fail.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London