By Irina Slav
Oil market sentiment has swung from bearish to bullish in the last few days as tailwinds for the commodity strengthen. A string of updates from OPEC and Venezuela, along with a couple of oil price forecasts served to push Brent to the highest since the start of the year, with prospects for the near future also positive.
OPEC said in its latest monthly oil market report its total production last month had fallen to 30.8 million bpd, down by almost 800,000 bpd, as the cartel seeks to prop up prices once again. That’s down from 31.6 million bpd in December and was in large part driven by Saudi Arabia’s efforts to accelerate the price rise by cutting more. The Kingdom pumped 350,000 bpd less oil in January than in December, at 10.2 million bpd, which was also more than it had agreed to cut.
Judging by the reaction of prices, with Brent touching US$65 a barrel earlier this week for the first time in more than a month, the “whatever it takes” approach has finally started working. Russia, meanwhile, added to the optimism with Energy Minister Alexander Novak saying it will speed up the cuts it had agreed to make this month and next.
The latest from the oil cartel prompted Goldman Sachs to issue an update on its expectations for prices and, unsurprisingly, this update was quite bullish. The investment bank said OPEC cuts will drive prices higher as they turn out to be deeper than expected and as they combine with stronger demand that will reduce inventories. Venezuela was the other factor that drove prices higher. After the U.S. imposed new sanctions on the government in Caracas, expectations among traders seemed to be of a quick escalation and a regime change that would limit the effect of lower Venezuelan production and exports on global markets, said Reuters’ John Kemp in a recent column on prices.
owever, the Maduro government has turned out to be more resilient than anticipated and now traders are beginning to expect a longer confrontation that could have a more lasting effect on global oil supply, with Venezuela being one of the world’s largest suppliers of heavy crude.
This is not a universally shared opinion, however. The International Energy Agency, for example, does not believe the removal of Venezuelan heavy crude from markets will have too grave of an effect on price patterns.
“What we do know is that the sanctions are already making it difficult for PDVSA to export oil,” the IEA said in the latest edition of its Oil Market Report. “Even so, headline benchmark crude oil prices have hardly changed on news of the sanctions. This is because, in terms of crude oil quantity, markets may be able to adjust after initial logistical dislocations. Stocks in most markets are currently ample and, with the implementation of the new Vienna Agreement at the start of the year, there is more spare production capacity available.”
However long the Venezuelan situation takes to resolve, previous supply shocks of a similar kind suggest the market’s reaction is strong at first but later mellows out and prices stabilize in the absence of another shock. Whether this is what will happen now as well, in spite of the OPEC cuts, remains to be seen. Especially given these cuts may have to be extended over a longer period of time than the initial four months to April: oil demand forecasts are still on the bearish side.