After the best January in history, up 20%, crude prices got off to a slow start in February but have been rising of late. As Principal at JTC Energy Research Associates Jude Clemente writes in an article "Mixed Signals For Oil Prices", published by Forbes, portfolio managers’ overall bullish position is up nearly 100 million barrelsover the past nine weeks. But, with two monthly outlooks released so far this year, EIA has been keeping its WTI and Brent spot forecasts at about the same level, $54.50 and $60.75 respectively. Hardly an exhaustive list here, but I do see mixed signals for the oil market.
Here are 4 reasons to be bullish on oil
Rising Demand. Just this past week, EIA forecast that global oil demand will rise another 1.5 million b/d this year and then again next year. IEA as well just put new demand in 2019 at 1.4 million b/d, unchanged from the forecast that it made in January. Remember that lower prices themselves encourage more demand, which can compensate for slower economic growth. New demand in 2018 was 1.3 million b/d. Longer-term, I must note that the rise in oil demand is consistently non-stop, up 7% by 2025 and 25% by 2050, per EIA's Annual Energy Outlook 2019 released in January.
Saudi and Russian Cuts. Saudi-led OPEC is combining with 10 Russian-led partners to keep 1.2 million b/d off the global market. Saudi Arabia now claims that its production will fall to just 9.8 million b/d in March, down from 11.1 million in November. As of a few days ago, Russia had reduced its production by ~85,000 b/d and pledged to cut output by 230,000 b/d from October’s 11.4 million b/d level.
Libya, Iran, and Venezuela. In January, OPEC took nearly 800,000 b/d off the global market, with a chunk of that coming from involuntary declines in this troubled triad of producers. U.S. sanctions on the latter two have helped tighten global supply. IEA reports that OPEC's compliance to the supply cut deal which began January 1 is 86%. During Q1 2019, OECD oil stocks should begin to fall to below the five-year average.
Sulfur Requirement. It seems far off to worry about, but in what some say will be the biggest change in the global oil market in decades, new regulations from the International Maritime Organization to limit the sulfur content of shipping fuel could push the world's refining system to the brink. Bloomberg reports that the new requirement could add $4 a barrel to the price of crude oil, although I think that is too high.
And in the other direction, here are 3 reasons to be bearish on oil.
Slowing Economic Growth. The U.S.-China trade row has surely been a concern for oil bulls, lowering global economic gain and thereby restricting new oil demand. The two nations met on Friday and have more talks coming this week. U.S. President Trump has indicated the March 1 deadline for the current truce could be extended if no deal is reached by then. Yet, nearly 30% of global CEOs recently surveyed believe that world economic growth will decline in 2019, compared to just 5% last year. For example, China's 6.6% economic growth in 2018 was a three decade low.
Rising Dollar. The U.S. dollar has been snapping back. The Dollar Index has been hitting highs not seen since December, becoming a safe-haven asset for investors. A stronger dollar makes oil, a dollar-priced commodity, less attractive for holders of other currencies. With a higher dollar thereby working to reduce oil demand in other nations, the dollar and oil prices have an inverse relationship, moving in opposite directions.
Surging U.S. Crude Oil Production. The most bearish oil factor out there is the booming production coming from the U.S. shale industry. With cost reductions forced upon them during the 2014-2017 price collapse, the U.S. oil industry is the most efficient that it has ever been. The drastic decline in breakeven costs for shale, from the $80s then to the low $50s area now, are increasingly being applied to other production zones, such as offshore. The increase in U.S. output is now expected to soar to heights nobody ever saw coming, compensating for output losses in other countries. EIA has the U.S. responsible for 75-85% of new global crude production through 2025.
Considering all of this, I remain bullish but not overly so and have Brent at $67 and WTI at $60 this year.
