Saxo Bank published its
Q2-2019 outlook today. Our commodity section opened with this observation: “Commodities have cast off the caution that defined the start of this year and powered to strong collective gains, led by energy and industrial metals. As we enter the second quarter the mood is still good, with crude oil riding atop a wave of price-supportive supply news, gold encouraged by a dovish Fed and copper pinning its hopes on a US-China trade détente.”
With a specific focus on crude oil we wrote: “Several Opec producers, and Saudi Arabia in particular, need oil back above $80/barrel to meet their fiscal obligations and they are unlikely to be satisfied with Brent at $70/b. On that basis, we expect supply to be kept tight over the coming months, thereby supporting a potential extension towards $75/b before it eventually runs out of steam amid renewed concerns about the negative impact to global growth.”
Events and news during the past couple of weeks since writing the above have, if anything, been strengthening the current sentiment in the market. All in all, creating a very lonely environment for those looking for lower prices, not least President Trump who through Tweets, with his base and rising gasoline prices in mind, has been asking Opec to provide more barrels. Also considering his desire to further tighten the screws on Iran when the current waivers are due for extension or extinction in a months’ time.
The combination of dramatic production cuts from Saudi Arabia, sanctions hitting Iran and Venezuela, signs of Chinese growth stabilising and a general strong risk appetite, continues to drive crude oil higher. Current developments show how Saudi Arabia has reasserted itself since the Khashoggi murder and doesn’t want to be blindsided by US Iran waivers once again. With an Aramco bond sale coming up and with Saudi Arabia in need of +80 dollar/barrel to balance its books it is more than likely that the kingdom is prepared to support a continued recovery in the price of oil towards levels where demand growth may start to suffer.
Charts highlighting the current sentiment. US crude oil production growth has stalled following the breakneck pace seen in 2018. The combination of adverse winter weather and the 44% price slump during Q4-18 is likely to have played its part. However, while the number of deployed rigs have dropped to a one-year low the EIA still expects production will continue to rise by 1.4m barrels/day in 2019 before slowing to 0.7m barrels/day in 2020.
