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.”
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.
“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.