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Brent Crude prices are expected to trade between $60 and $70 a barrel by the second half of this year, unless a sharp global economic slowdown mars the outlook for global oil demand, the Arab Petroleum Investments Corporation (APICORP) said in its latest energy research note.
Following the four-year highs of $85 Brent Crude in October, the international benchmark slumped to just $54 at the end of 2018. The key reasons were concerns about global economy, rising production in the three biggest oil producers—the U.S., Russia, and Saudi Arabia—and a drop in sentiment, said (APICORP), a multilateral development bank set up in 1975 under an agreement signed by the ten Member States of the Organization of Arab Petroleum Exporting Countries (OAPEC).
The collective production cut of 1.2 million bpd from OPEC and its Russia-led non-OPEC partners in the deal might not be enough, APICORP warns, but noted that “The dynamics of oil prices in 2019 will also depend in large part on OPEC’s effectiveness in implementing the cuts, balancing the market and reinforcing the credibility of its signals.”
“While OPEC is expected to cut its output in 2019 in an attempt to balance the market, US production should maintain its upward momentum,” the bank said.
According to APICORP, the pace of global oil demand will be more important for oil prices than the supply side of the market.
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“According to recent research from the OIES, stronger than expected oil demand growth has been responsible for 80% of the market rebalancing and thus any slowdown in the global economy that results in lower demand growth will have a drastic effect on oil prices. And concerns about the global economy have been mounting,” APICORP said.
“In conclusion, purely based on fundamentals, a collective cut of 1.2 mb/d between OPEC and its allies, high probability of supply losses from Iran, Venezuela, Libya and Canada, and global oil demand growth of 1.4 mb/d, the market will achieve balance in 2019.”
Oil prices will continue to be under pressure until the market begins to show signs of stock drawdowns, according to APICORP.
“OPEC’s primary challenge will be to address the physical market imbalances, and assert its credibility to consistently manage expectations and sentiment,” the bank said.
By Tsvetana Paraskova for Oilprice.com
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Tsvetana is a writer for Oilprice.com with over a decade of experience writing for news outlets such as iNVEZZ and SeeNews.
Three 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 second development is that 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 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 even cutting exports 800,000 b/d below November levels, which appears to be a larger reduction than required as part of the OPEC+ agreement.
The third development is the reported slowdown in US shale oil production. The latest disclosure by the Wall Street Journal (WSJ) that US shale companies have over-hyped the production potential from thousands of shale wells comes in the footsteps of many authoritative organizations including MIT accusing the US Energy Information Administration (EIA) of overstating US oil production.
The EIA’s claim that US oil production reached 11.7 mbd in 2018 is overstated by at least 3 mbd made up of 2 mbd of liquid gases and 1 mbd of ethanol all of which don’t qualify as crude oil. In fact International Exchanges around the world don’t consider them as substitutes for crude oil. And if the International Exchanges don’t accept them as substitutes, then they are not crude. Therefore, US oil production could have been no more than 8.7 mbd in 2018.
And despite bullish influences 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.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London