Oil prices have shot up impressively this year. Both Brent and WTI crude futures are trading at their 2019 highs right now thanks to the supply chain actions undertaken by the likes of OPEC and its allies.
In November last year, OPEC and its allies made a commitment to bring the oil inventory glut under control. The oil cartel and its partners struck a deal, which came into effect on Jan. 1 this year, to cut production to the tune of 1.2 million barrels per day for the first six months of the year. Analysts believe that such a move will tighten the oil market supply by the third quarter of the calendar year, and push Brent oil prices beyond $70 a barrel.
The good part is that the cuts have worked. Brent crude is trading close to $67 per barrel, while the WTI index recently touched $59 per barrel. But the question that we need to ask ourselves now is whether oil prices can rise further or not, especially considering that we are halfway through OPEC’s planned production cuts that will expire in June?
The Demand Scenario
Analysts expect oil demand in 2019 to be better than last year, though macroeconomic concerns could act as headwinds. More specifically, oil demand is expected to grow to the tune of 1.4 million barrels per day this year following last year’s increase of 1.3 million barrels per day, according to the International Energy Agency.
Further evidence of strong oil demand comes to the fore if we consider the recent inventory report out of the U.S. — crude oil inventories dropped to the tune of 9.6 million barrels according to the latest inventory report, while analysts were originally expecting a rise of 309,000 barrels. Also, the 439.5 million barrels of oil stock inventory in the U.S., as reported by the EIA, is currently 2% lower than the five-year average for this period of the year.
However, there is a feeling that oil demand might lose steam on account of weak economic growth across North America, Europe, and Asia. Also, the trade standoff between China and the U.S. could also dent demand for oil if a solution isn’t hammered out between the two countries. But the good part is that even if there’s a slight slip in the demand due to economic headwinds, the oil pricing scenario will remain favourable because of supply factors.
The Supply Scenario
Apart from OPEC’s voluntary production cuts, there are other factors that will keep a handle on oil supply going forward. The U.S., for instance, has imposed sanctions on oil producing countries such as Iran and Venezuela, which is taking supply out of the international market.
As a result, the EIA expects global oil production and supply to move almost hand in hand for the remainder of the year, which will keep implied oil inventory build-up under control. This should ensure that the price of crude oil at least remains at its current levels.
But if the economic scenario takes a turn for the worse, oil prices could start sliding again. This is why oil industry investors should keep a close eye on macroeconomic developments and plan their investments accordingly.
