Oil prices firm as supply deficit emerges amid disruptions

FILE PHOTO: Drilling rigs in the Cromarty Firth near Invergordon, Scotland
FILE PHOTO: Drilling rigs are parked up in the Cromarty Firth near Invergordon, Scotland, Britain January 27, 2015. REUTERS/Russell Cheyne

March 15, 2019

By Henning Gloystein

SINGAPORE (Reuters) – Oil prices were firm on Friday amid production cuts led by OPEC and as U.S. sanctions against Venezuela and Iran likely created a slight deficit in global supply in the first quarter of 2019.

But oil prices have been capped by concerns that an economic slowdown will soon start denting growth in fuel demand.

Brent crude oil futures were at $67.27 per barrel at 0425 GMT, 4 cents above their last close, and within a dollar of the $68.14 2019-high reached the previous day.

U.S. West Texas Intermediate (WTI) crude oil futures were at $58.63 per barrel, 2 cents above their last settlement, and not far off their 2019-high of $58.74 from the previous day.

Despite Friday’s dips, oil has rallied around a quarter since the start of the year.

“Crude oil continues to grind higher…in response to ongoing production cuts from the OPEC+ group of producers as well as another (output) slump from a blacked-out Venezuela,” said Ole Hansen, head of commodity strategy at Denmark’s Saxo Bank.

The Organization of the Petroleum Exporting Countries (OPEC) and non-affiliated allies such as Russia – known as the OPEC+ alliance – pledged to withhold 1.2 million barrels per day (bpd) in crude supply from the start of the year to tighten markets and prop up prices.

OPEC+ will meet in Baku, Azerbaijan, over the weekend to review its output policy, although most expect the cuts to continue for now.

“We don’t think anything will be agreed this weekend. But, we suspect the group will make noise about the ongoing effort to keep this market in balance,” ANZ bank said on Friday.

Meanwhile, U.S. sanctions against Venezuela as well as Iran have further tightened oil markets.

With OPEC voluntarily withholding supply and U.S. sanctions preventing Iranian and Venezuelan oil from entering markets, global crude flow data in Refinitiv showed a slight supply deficit likely appeared in the first quarter.

(For a graphic on ‘Global oil supply & demand’ click https://tmsnrt.rs/2O4NEW5)

WILL DEMAND HOLD UP?

Preventing oil from rising further have been concerns that a economic slowdown that has gripped large parts of Asia and Europe, and which is showing signs of spilling into North America, will soon dent fuel demand growth.

But oil demand has held up well so far.

Crude oil use in China, the world’s biggest importer, in the first two months of 2019 rose 6.1 percent from a year earlier to a record 12.68 million bpd, official data showed this week.

“Oil demand concerns are overdone,” Goldman Sachs said in a note on Friday.

The U.S. bank said January global crude oil demand growth was “nearly 2.0 million barrels per day, with strength visible in both emerging markets and developed economies”.

Goldman said “current fundamentals will tighten physical markets further”, driving up spot Brent crude futures above $70 per barrel “as supply losses continue (and) demand growth beats low consensus expectations”.

(Reporting by Henning Gloystein; Editing by Joseph Radford)

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