First Quarter 2019

• Date: 01 July 2019
• Published date: 01 July 2019
• DOI: http://doi.org/10.1111/oet.12720

OIL PRICE REVIEW

First Quarter 2019

January

Brent crude began the year at a low point of $54/bbl but

quickly began to rise as OPEC/non-OPEC parties to the

December crude supply deal began to implement the agreed

cuts, which amount to 1.2 mn bd for the first half of 2019.

Key OPEC swing-producer, Saudi Arabia, emphasized its

full commitment to the deal, cutting output to 10.21 mn bd

in January—down from 10.6 mn bd in December and below

its 10.31 mn bd commitment.

The threat of tougher US sanctions on Venezuela from

the end of the month, also cut output, although neither

Iran—which is also subject to US sanctions—nor Venezuela

had a quota under the deal. Overall, OPEC achieved an

800 000 bd cut in January, with output averaging 30.8 mn

bd, down from 31.6 mn bd in December.

By the end of January, OECD stocks were falling close

to 5-year averages, which had been an OPEC objective since

intervention began in 2017. However, the higher recent

totals have pushed the 5-year average up to 2.85 bn bbl,

which may still be too high for the Saudis.

Refinery margins began the year in buoyant mode, indicat-

ing some tightness in the international fuel markets, and help-

ing drive refinery runsand crude prices up during the month.

February

Brent crude stayed in the low-to-mid $60s/bbl throughout

February, with support coming from continued target over-

compliance from Saudi Arabia and other GCC members,

along with a sharp fall in sanctions-hit Venezuela, while mild

weather in Europe and northeast Asia cut heating demand.

US sanctions on Venezuela introduced in late January saw

output fall to below 1 mn bd in February, down from 1.25 mn

bd in December. As well as thedirect impact on crude exports,

the sanctions are causing problems with the production of

Venezuela's heavy Orinoco-Belt crude, because it requires the

import of naphtha andother diluents to enable it to flow.

The cuts in Venezuelan, Saudi and other OPEC output hit

heavy sour grades disproportionately,boosting their prices rel-

ative to light sweet benchmarks. For example, in the US Gulf,

front month Mars crude, a heavy sour US benchmark, was

assessed at a $6.40/bbl premium to front-month (light sweet)

WTI in early February—the widest since January 2014.

Heavy grades also rose sharply in Europe, prompting Saudi

Aramco to hike its official formula price for March-loading

cargoes of Arab Heavy to the Mediterranean by $1.15/bbl.

On the demand side, all eyes were on the prospects for

global economic growth. February saw some recovery in

stock markets (after the steep falls in Q4 2018) and signs of

progress on United States/China trade talks. In its February

report, OPEC expected demand to reach 100 mn bd in 2019,

up 1.24 mn bd on 2018—which is down on earlier forecasts.

March

Oil prices stayed well supported during March, helped by

falling Venezuelan exports and even tighter adherence to

OPEC/non-OPEC's December deal. Signs of slower-than-

expected US output growth were also supportive, but

worries over the global economy and slower-than-expected

demand growth limited price rises.

OPEC (primarily Saudi Arabia) kept a tight rein on pro-

duction all month—keeping prices close to or above $65/bbl

for front month Brent, which ended the month just below

$70/bbl. Saudi Arabia cut output to 9.8 mn bd, which was

over 500 000 bd below its commitment—boosting market

sentiment, and overall OPEC production fell 550 000 bd to

just over 30 mn bd, the lowest level since February 2015,

according to OPEC. This helped global supply drop 340 000

bd in March, which meant OPEC finally broke through its

target of cutting inventories below their 5-year average.

Led by the Saudis, OPEC and its allies decided on March

18 to maintain their 1.2 mn bd oil production cuts until the

end of June, when another meeting is set to take a decision

on whether to extend the cuts into the second half of the year.

US crude production rose by 100 000 bd in early March,

back to its all-time high of 12.1 mn bd. Libya also saw an

increase after the government restarted output at the coun-

try's Sharara Field, following a 3-month shut down due to

unrest in the area. Overall production rose to 1.2 mn bd in

March, despite increased fighting as General Haftar

maintained his attack on the capital of Tripoli. However, the

unrest has led to the shelving of expansion plans and is

likely to erode production over coming months, unless either

side can impose order and security (see Focus).

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