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Crude oil caught in a tug of war, US shale may fire up the bulls

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Crude prices ended March on a positive note after markets got some confidence amid rising evidence that Saudi Arabia and other major oil producers are making good on their pledge to reduce production.

The latter half of the month saw the price stay range bound near monthly highs, supported by OPECs supply reduction enforcement. But the prices soon hit new 2019 highs in both spot and futures market as the supply disruption from Venezuela lasted longer than usual.

The outages in Venezuela and Iran, along with the strong production cuts from OPEC+, are undoubtedly tightening up the oil market. The one thing holding back oil prices seem to be concerns about the global economy and how the US-China trade war might impact that outlook.

On the other hand, a sudden and expected draw in US weekly crude oil inventory data in both API and EIA stockpiles added support to the oil bulls. But declining bond yields in global market which resulted in increased risk averse trading and concerns of economic slowdown weighed.

Meanwhile, the US rig count fell by 37 rigs in March, the most in a month since April 2016 when it declined by 40. For the quarter, the rig count fell by 69, the most in a quarter since the first quarter of 2016 when it fell by 164 rigs.

The main reason for the slowdown happened as independent exploration and production companies cut spending as they focus on earnings growth instead of increased output, with prices projected to decline in 2019 as against 2018. US crude production slipped in January to 11.87 million bpd (mbpd), from a monthly record high of 11.96 mbpd in December.

Monthly Report
The three most closely watched oil market forecasters are all bracing for a significant surge in non-OPEC supply growth in 2019, but differ on the extent to which global supply will outweigh demand.

Monthly report from the IEA showed that market will flip into a modest deficit from the second quarter of this year, with OEPC possessing a hefty supply cushion to prevent any price rally in the case of possible supply disruptions. The IEA kept its forecast of growth in global oil demand this year unchanged at 1.4 per cent, or 1.4 mbpd.

Solid growth in non-Opec oil output led by US should ensure demand is met, the IEA said, adding that the market could show a modest surplus in the first quarter of 2019 before flipping into a deficit in the second quarter by about 0.5 million bpd. For supply, the US continues to dominate supply growth in the medium term.

This is happening because US shale is able to respond to price signals more swiftly than other sources of supply. In fact, even more US supply could be on the way if prices rise beyond current levels. The IEA forecast that the US accounts for 70 per cent of the total increase in global capacity till 2024, adding a total of 4 mbpd. This follows spectacular growth of 2.2 mbpd in 2018.

OPEC in its monthly report stated that its crude output had fallen by 221,000 bpd in February from January, to average 30.55 mbpd, citing secondary sources. That compares with a decline of 7,97,000 bpd in January, the first month in which a fresh OPEC-led plan to limit production took effect.

On the other hand, OPEC revised downwards its projection of this year's global oil demand to below 100 mbpd for the first time since it started forecasting 2019 fundamentals last July. Meanwhile, the projection of supply from outside OPEC this year was revised upwards from last month's report to 64.43 mbpd, a rise of 2.24 mbpd from 2018, led by continued strength in US shale production.

OPEC saga
The crisis in Venezuela does not appear to be close to a conclusion. The oil production in the South American country fell 1,40,000 bpd in February and could fall even more this month. The country was crippled by a widespread blackout, which decimated oil exports. Nobody knows how this is going to play out and with the situation so fast-moving, events on the ground can change quickly.

Additionally, the US has instructed oil trading houses and refiners around the world to further cut dealings with Venezuela or face sanctions themselves. This is another potentially bullish development.

Saudi Arabia continues to be in the driver's seat. As the biggest oil exporter in the world, fluctuations in exports month-to-month could send markets into surplus or deficit. Over the last three months, Saudis have kept exports around 7.1 mbpd with March being the lowest at nearly 7 mbpd.

But in April, the early guidance from the Saudis is that exports will be close to 6.5 mbpd or 500k bpd lower than the previous month. Such a reduction in export will send a shockwave in the market because global refinery maintenance season officially concludes at the end of April.

In addition, the sanctions on Venezuela have already tightened global sour crude. So, a further reduction in overall exports would only tightRead More – Source

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