The oil price picked up this week with Brent Crude hitting its highest level above US$66 this year.
The supply adjustment from OPEC and friends is having the desired impact with talk of a rally on the market. Weekend trade saw Brent crude holding above $US66 with WTI holding strong close to US$56 a barrel.
The market is clearly feeling the pinch from OPEC’s 6-month production cut agreement with Saudi Arabia pumping below quota.
The country’s oil minister, Khalid Al Falih said he expects supply to be 9.8 million barrels a day in March. That’s about half a million barrels lower than what they previously agreed to deliver. In November last years, Saudi Arabia’s contribution to the global market was just above 11 million barrels a day.
While the OPEC cuts take oil off the market, US sanctions against Venezuela are also adding to the tightness. Iranian barrels continue to come off the market as the waivers granted several months ago are soon up for consideration.
There’s been ongoing conflict in Libya over the country’s biggest oil field and militant unrest in Nigeria has been heating up as the country holds Presidential elections this weekend. Adding uncertainty to the market is the standoff between the US and China over trade talks, with meetings expected to resume next week.
The global economic demand looks slower than last year and this will impact oil demand. The president of Prestige Economics, Jason Schenker says “weak GDP growth would likely engender choppy-at-best trading dynamics for equity markets. But in reality, if retail sales growth slows, we see the potential for slower GDP growth and significant downside risks to equity markets.”
Looking at the technical state of the market, there’s a feeling this rally might hold as prices stay at these levels. The market has moved into backwardation and in a report from Capital Economics, this is “quite a transformation from the steep contango curve at the end of last year, although the prices of longer-dated futures have not moved by much.”
Inventories in the US showed a rise in crude stocks, partly due to lower refining utilisation this month. The Baker Hughes count of oil and gas rigs in the US increased last week by 3 to total 857 rigs.
The market gained more than 6 percent last week as tightness of supply is clearly evident.
OPEC will continue to enforce production discipline with geopolitics also contributing to lower supply and everyone will be watching the outcome of the next round of US and China trade talks.