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Oil rises to hit highest price since last year OIL & GAS

US sanctions on Venezuela and Iran have triggered the latest rally

  • The National – News
  • 19 Feb 2019
An oil refinery at sunset in Texas. The US is now the world’s top producer

Oil prices rallied to their highest level in three months, recouping earlier losses, bolstered by a decline in production in Venezuela, Opec supply cuts and the prospect of a breakthrough in trade talks between the US and China.

Brent futures hit a high of $66.78 per barrel yesterday, while West Texas Intermediate, the benchmark used for North American crude, surged past $56 per barrel for the first time this year.

The rally comes after oil prices tanked dramatically towards the end of last year, after rising to $86.29 per barrel in October before declining to a low of $50.47 per barrel in December.

The fall came amid surging supply from the US shale basins, which propelled the country to become the world’s leading producer by the end of last year.

Analysts such as Giovanni Staunovo of UBS expect the latest rally to be sustainable. However, he cautioned that volatility will continue to dominate momentum.

“We continue to expect Brent to move to the $70-$80 per barrel range … we believe the rally should be sustainable,” he said. “However, as we have seen this year it is not a straight move up to that range, but it comes with volatility in both directions.”

US sanctions against Opec member Venezuela have tightened supply, which is expected to remove 300,000 to 500,000 barrels per day of exports from the global oil markets.

Also weighing on the markets are restrictions on Iran by Washington, which is unlikely to renew waivers on countries importing from Tehran in May.

The Trump administration had in November allowed some of Iran’s existing buyers to continue importing, with the proviso that they would gradually reduce shipments.

Market tightening will continue because of losses in the “fragile three” – Iran, Libya and Venezuela, said Mr Staunovo. He also expected Opec+ production compliance to improve over the coming months.

The alliance led by Saudi Arabia and Russia is carrying out production cuts of about 1.2 million barrels per day from January until June.

“We expect Opec+ compliance to improve thanks to Saudi Arabia’s pledge to scale back output to 10.1 million bpd in February and 9.8 million bpd in March and larger cuts promised from Russia over the coming months,” said Mr Staunovo.

The US trade dispute with China also weighed on oil prices. The Trump administration has set March 1 as the deadline to come to an agreement on a trade deal, which according to some reports is within reach.

Trade disputes are also likely to affect oil prices for the foreseeable future, BP cautioned in its latest energy outlook. Reduced openness of the global economy will lead to a slight reduction of about 0.3 percentage points per year in global gross domestic product growth, with increased concerns about energy security likely to add a 10 per cent risk premium to imported sources of fuel, the oil major noted.

The trade deal could impact the market positively, supporting risk sentiment, said Mr Staunovo.

“While trade war concerns are likely will continue to influence financial markets, for crude oil we believe the supply side is more important as a near-term driver for prices,” he said.

“Thanks to a strong decline in Opec+ output, the oil market is likely to tighten up over the coming months.”

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