Oil prices started well this week but are there storm clouds ahead?

The optimistic start to the week was short lived and in Friday trading, Brent was struggling close to US$62

Oil workers
A report this week from Bank of America Merrill Lynch says that growth in oil demand will be slower than expected

While oil prices may have begun the week at their highest level for 2019, the shine came off the market in later days.

Brent was trading in the high sixties early in the week with WTI close to US$56 a barrel.

Sadly, the optimistic start to the week was short lived and in Friday trading, Brent was struggling close to US$62 with WTI just above US$53 a barrel.

Uncertainty impacts market

Uncertainty about the direction of the global economy will always impact the oil market and government manufacturing data from the US showed a decline in demand for American made goods in November.

A stronger dollar is also making oil more expensive for other countries. Crude inventories in Cushing, Oklahoma were up by more than 943,000 barrels last week.

The global head of commodities research at Citigroup, Ed Morse told CNBC that the stock build-up is “why we’re seen most of the WTI sell-off”.

There’s also concern about the US China trade talks, with little immediate resolution in place.

The supply adjustment promised from OPEC and friends that began in January is making an impact.

Non-OPEC leader Russia has decreased production by 470,000 barrels a day as promised.

The Russian energy minister Alexander Novak issued a statement earlier in the week. OPEC has often talked about cementing the non-OPEC players in the Declaration of Cooperation and when there was talk of Russia not interested in stronger cooperating, it is believed that Saudi Arabia and the United Arab Emirates have stepped up their lobbying effort.

Novak has always said he is willing to continue with a special mechanism of cooperation to allow joint resolutions in the future. As a back lash, a bipartisan group of American senators say they intend to push for a bill giving the US Justice Department power to sue members of OPEC for antitrust violations.

OPEC watches market

As OPEC carefully watches the market and adjusts its production every month, supply from Venezuela continues to dwindle as the US gets tough on sanctions for its Latin American neighbor.

The US granted waivers for 8 countries buying Iranian crude will expire at the end of April and supply from Libya and Nigeria has also been hampered in recent months. OPEC supply to the global market is currently on the decline, at its lowest in two years. Meanwhile, US supply keeps rising, 11.9 million barrels a day at last official count.

While oil demand remains buoyant for years to come, a report this week from Bank of America Merrill Lynch says that growth in demand will be slower than expected. By 2030, the report expects global oil demand to peak, and by 2024 the bank says that demand growth will be half to 0.6 million barrels a day from its current growth of 1.2 million barrels a day. By 2030 the expectation is no growth and it expects a decline thereafter.

More gloom and doom was delivered this week by New York University’s Stern School of Business professor and economics guru, Nouriel Roubini. When talking about “a cloud over the global economy,” he said that oil prices may be driven downwards “by a coming supply glut owing to shale production in the US, a potential regime change in Venezuela and failures by OPEC countries to cooperate with one another to constrain output”.

The big danger, he adds, is the power of lower prices to spread contagion on the stock markets, especially in oil-producing countries and the prospect of corporate defaults among energy players.

2018 was a strong year for most key players in the energy sector as full year earnings have been released in the past couple of weeks.

BP sees healthy performance

BP saw healthy performance across all business sectors and doubled its earnings with profits of US$12.7 billion, stronger than anticipated.

The group CEO, Bob Dudley said it was “the end of a great year” for the company. For 2019 he said, "returns will always move a bit with the oil price” and said he “feels like the market will be firmer."

When pushed on price predictions on CNBC, Dudley said he was keeping his options open on price and planning within a range of between US$50 to US$65 a barrel.”  Exxon Mobil, Chevron, Shell and Total all reported strong earnings for 2018.

This will be the second month of production adjustments from OPEC and friends and the impact is being felt on the market as supply shrinks.

Despite American production on the rise, the right kind of crude is important to meet demand and not everyone can deliver that with sufficient speed. OPEC says it remains flexible about production adjustments to meet the needs of the market.

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