Crude prices rallied before the end of the week and gained 5% in reaction to the new production cut agreement. LAst week, OPEC announced that it will reduce overall production among its members by 1.2 million bpd during the first six months of 2019 in an effort to stave off a global glut in supplies and prop up prices.
The recent decline in crude prices sparked jitters as international trade relations between China and the US escalated and raised concerns about demand for oil. Market tension intensified after the arrest of Huawei Technologiess chief financial officer, Meng Wanzhou, in Canada at the request of the US.
OPEC-led group agreed to roll back output by 1.2 million bpd during first six months of 2019 against the expectations for a cut between 1 million and 1.4 million bpd. OPEC will curb output by 0.8 million bpd from October levels while non-OPEC allies contribute an additional 0.4 million bpd of cuts.
A further breakdown shows Saudi Arabia will reduce its production down to about 10.7 million bpd in December and 10.2 million bpd in January. Russia is going to be responsible for cutting about 2,28,000 to 2,30,000 bpd.
For this week, data from EIA showed that inventories fell by 7.3 million barrels for the week against the expectations for a decline of 2.39 million barrels. This was the first reported draw in 11 weeks. EIA reported a rise in gasoline stockpiles by 1.7 million barrels against the expectations for an increase of 3,57,000 barrels while distillate stockpiles climbed by 3.8 million barrels against an expectation of 1.25 million barrel build-up in inventories.
Offering a hint on US production activity, Baker Hughes reported that the number of active domestic rigs drilling for oil fell by 10 to 877.
US exports and imports
For this month, the major factor that added pressure to the bearish momentum was data which showed that the US became a net oil exporter last week for the first time in 75 years. US crude oil exports surged to record high of 3.203 million bpd last week as oil production hit record highs. EIA data showed that US crude oil production kept at a record 11.7 million bpd throughout November, which was more than what each of Russia and Saudi Arabia pumped in November, although the Saudis are also expected to have reached record highs in their production last month.
China, the world's biggest oil importer, over the weekend reported an annualised 8.5 per cent jump in November crude imports, to 10.43 million bpd, marking the first time when China imported more than 10 million bpd. That leaves the world's second-biggest economy on track to set yet another annual import record. The country's crude imports in November totalled 42.87 million mt, up 10.3 per cent from 38.88 million mt in October. This has supported prices as the increase in imports reduces the fear of slowdown in global demand.
Natural gas price moved higher following a drop in the wake of the EIA estimate of stockpiles. The EIA storage report showed a 63 bcf withdrawal from storage stocks during the week-ending November 30. Demand in the US fell in the latest week as LNG exports continue to rise. China has now become the largest importer of natural gas, and a trade agreement would go a long way towards increasing US exports.
Total US consumption of natural gas fell by 1 per cent compared with the previous week. Prices remain supported after a strong cold weather forecast for the next week followed by higher demand for natural gas.
The current trend for crude remains positive and the markets can get an additional boost from a weaker dollar, which could drive up foreign demand for US crude. However, gains could be capped by concerns over a slowing global economy, worries over a potential escalation in the US-China trade dispute and stock market weakness and volatility.
Market players will also focus on monthly reports from OPEC and the IEA this week to assess global oil supply and demand levels. We expect crude to trade in a broad range of $50-56 for WTI.
The writer is AVP- Commodity Research, MOFSL