Crude oil futures rally for 3rd week on production cut

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Benchmark crude oil futures rallied for a third week, with gains of around 3.7% & 4.3% for Brent & WTI respectively. Prices increased by almost 18% in the last three weeks, erasing about 40% of the losses incurred since early October. This shows how volatile the oil prices still are, even though volatility declined significantly since its peak in late November. The price boost is a result of the expected 1.2mn bpd production cut from the Opec+ group of major crude exporters, which started this month, of which the detailed quota allocation system was released last week. 

Support also came from a rally in US equity markets, progress in the US-China trade talks, and a new Chinese policy incentive to stimulate the country’s economy. However, several factors limited the price upside including new record US crude production that approached 12 mbpd last week, and is expected to reach 13 mbpd next year, and the disappointing December Chinese export/import data.Opec December’s production figures show a decline of 0.75 mbpd to 31.6 mbpd, which sends a strong signal to the market about the organisation commitment to its pledged cut deal of 0.8 mbpd. However, Opec estimates the average demand for its crude this year to be about 30.8 mbpd. Therefore, the compliance to the Opec+ cut deal will be critical to keep the market balanced throughout the year, and not only for the first six months of 2019, as currently agreed by the Opec+ countries.

Asian spot LNG prices fell last week by 3.5%, which is the fourth straight weekly drop, for a total decline of almost 12% since the end of 2018. The Asian spot LNG market is still considered well supplied amid signs of stagnant demand. Inventory levels at Japanese and Chinese clients are deemed sufficient for the remainder of a normal winter season, however this could change if weather forecasts change drastically, especially for the upcoming Chinese New Year. Selling offers were available in Angola, Papua New Guinea and Russia, while planned and unexpected plant maintenance at Bontang in Indonesia and Gorgon in Australia limited price losses.

In the US, Henry Hub natural gas futures ramped up their rally with a 12% rise last week due to high variability in temperature forecasts. Prices strengthened due to cold weather forecasts for late January, despite a warmer outlook this week, which would likely reduce the storage deficit to 10.6%.Meanwhile, UK gas futures modestly gained 0.5% on a cold spell that could extend through to February, amid a strong supply from the domestic fields and from Norway. 

This article was supplied by the Abdullah bin Hamad Al-Attiyah International Foundation for Energy and Sustainable Development.

Sources and photo-credits: Gulf Times