Tight market may give OPEC pause for thought

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Oil continued its rally, driven by involuntary supply losses from Venezuela, Iran and Libya. The market has steadily tightened for the second month in a row and it seems that Brent has settled around the $70 per barrel mark.

Brent closed the week at $71.55 per barrel and WTI increased to $63.89 per barrel. The Brent/WTI spread has further narrowed to $7.66 per barrel. The spread narrows as US output rises. This is causing US storage capacity to fill as US shale exports are less competitive compared with Brent related crude.

As a result, WTI cargoes have become less attractive and demand for US exports has fallen. The International Energy Agency (IEA) noted that the market remained tight in its latest monthly Oil Market Report.

It said: “The oil market shows signs of tightening as we move into the second quarter of 2019, but we see mixed signals in terms of the outlook for demand.”

However, the US Energy Information Administration (EIA) upwardly revised it’s forecast for WTI and Brent in its April Short-Term Energy Outlook. The organization forecast WTI prices to average $58.80 in 2019, up $2.16 from its March forecast. It expects Brent crude to average $65.15 this year, up $2.37 from its previous forecast.

The possible rally in prices, heading toward the mid-$80s for Brent, may leave customers with an uncomfortable feeling. Output declines from Iranian, Venezuelan and Libyan supplies added to the already tight market.

Venezuelan crude production is likely to fall further after it dropped below 1 million barrels per day because of US sanctions. Iranian supplies could also further decline after May if, as many expect, Washington tightens its sanctions against Tehran. Libyan output is not stable and the market cannot rely on these supplies.

Neither can the market rely on Iranian supplies whether sanctions waivers are extended or not. If crude supplies continue to tighten further as we move closer to the summer high demand season for gasoline, and if prices do indeed advance into the $80’s, OPEC may change its output strategy beyond June 2019.

Faisal Mrza is an energy and oil marketing adviser. He was formerly with OPEC and Saudi Aramco. Twitter: @faisalmrza

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