Oil near 3-month highs but supply cut issues in focus

Summary:

  • Oil remains close to 3-month high
  • Price supported by Saudi cuts, but Brazil production on the rise
  • 55.65 a key level to watch for Oil.WTI

The crude markets remain well supported and close to their highest level in 3 months, with the cuts amongst OPEC members seemingly achieving the target of stabilising the market. Saudi Arabia, the de facto leader of the organisation, went beyond the pledged output cuts in January, but it is worth pointing out that only 10 of the 21 OPEC+ coalition fully complied with the agreed cuts. 11 OPEC members and 10 non-OPEC have agreed to cut approximately 1.2m barrels per day of production from the crude market, but there is a marked difference between the two groups in their actions.

Amongst OPEC the level of compliance was a fairly good 86%, but non-OPEC producers are clearly not as committed with just 25% of the promised cuts delivered. There’s a clear element of game theory at play here, where as a whole all producers agree that they would like lower production and thus higher prices, but on an individual level there’s an incentive to cheat for individual gain IE Agree with all other countries to cut, but then continue high levels of production and generate greater profits from the subsequent higher prices.

In effect this means that OPECs efforts are being undermined to some extent, and a further headache from the group may come from Brazil, with the Latin country forecast to post its fastest pace of growth in annual output for 20 years in 2019. Brazil produced nearly 2.7M bpd in December which means that while it is often overlooked in terms of output, it is around the same level as OPEC-members Kuwait and Iran.

Brazil is forecast to increase annual oil production by 400k bpd in 2019, with the rise second only to US shale in terms of non-OPEC increases. Source: IEA, Bloomberg news

Oil.WTI remains close to its recent highs, with price still above the breakout level seen around 55.65. Price is riding the upper Bollinger band but unless there’s a drop back below the 55.65 level then the market remains well supported. Source: xStation

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