Brent crude prices are expected to hold above $70 a barrel this year on supply concerns in the wake of re-imposition of US sanctions on Iran, possible extension of production cuts by Opec+ group of oil producers to another six months and political turmoil in Libya and Venezuela, experts say.
Latest surveys and research reports also indicates that oil prices are expected to sustain the present levels throughout the year as supply disruption, weaker global growth and geopolitical tension will weigh on the market. Experts said $70 average oil price will give cushion to the UAE who prepared 2019 budget at $65 average price.
According to a poll of 10 investment banks by the Wall Street Journal, Brent crude is now expected to average $70 per barrel for the whole year whereas as recently as March, the same group had said it would be $68 per barrel.
National Bank of Kuwait (NBK) also said that oil prices are expected to firm up during second and third quarter of the year. In its latest research, NBK indicates that a more aggressive response vis-à-vis Iran in the context of falling Venezuelan production could lead to an even tighter market, especially in heavy crude, and propel crude prices.
"We expect oil prices to firm up over the second and third quarters of this year, as estimated global oil demand remains unchanged and the demand/supply balance flips into deficit for the second and third quarter of the year," said Dr Saade Chami, chief economist at NBK Group.
Another survey conducted by Gulf Intelligence in April said 89 per cent participants are confident that Brent crude price will hold above $70 a barrel in second quarter. About 57 per cent of the survey audience attributed the credit of market stability to Opec+ group of producers and 24 per cent felt that the re-imposition of US sanctions on Iran would be the main impetus behind the higher oil prices.
"Of course, the oil price outlook rests on several moving parts, both economic and political, and not all of which will necessarily come into play to the extent envisaged - or at all - during the remainder of the year. Policy changes, global geopolitical conditions and market dynamics will continue to affect a rapidly shifting price environment," Dr Chami said.
Brent crude oil futures settled at $70.62 a barrel on Friday while US West Texas Intermediate (WTI) crude futures closed at $61.66 a barrel. Brent prices, rose more than 30 per cent so far this year, averaged in the $60s during the first quarter.
Improving oil prices have been driven by a tightening market, with production cuts across a number of global producers. Opec's efforts to set production limits, in addition to commitments to the Vienna agreement, have resulted in significant reductions in output by leading oil producers.
Political turmoil has resulted in a supply adjustment, with output from Venezuela, Libya and Iran falling. Even in the US, supply has been less bullish. While US crude production continues to break new ground, the number of oil drilling rigs has fallen for six consecutive weeks, by 7.8 per cent in 2019.
Mihir Kapadia, CEO of Sun Global Investments, said investors are uneasy as US influence over global oil markets grows at a time when the US President Trump is openly critical of Opec's policy of oil output cuts, raising questions over how Opec and its partners will respond.
"Rising oil stockpiles in the US continue to weigh on oil prices. Rising US production continues to offset the effects of sanctions on Iran and Venezuela's oil production, as well as Opec's own supply cuts," Mihir Kapadia, CEO of Sun Global Investments, said.
"With Brent and WTI crude oil futures both making gains of over 30 per cent since last year, the losses last week highlight the degree to which that the limiting of output from both Venezuela and Iran have helped to support oil prices," he said.
Faisal Hasan, head of Investment Research at Kamco Research, said the shrinking supply-demand gap recently has led to consistent gains in oil prices. However, the market tightening is primarily led by supply-side factors.
In March, he said production by Opec members reached multi-year lows and was reported at 30.4 million barrels per day as almost all the producers slashed production based on their respective quotas, in addition to the plunge in production in Venezuela. As a result, he said Opec compliance to the agreed limits of the Opec+ agreement reached 155 per cent in March-2019 as compared to 104 per cent in February 2019.
"Non-Opec countries including Russia and Kazakhstan also contributed to the supply cuts although these producers face pressure from local companies on raising output post June 2019. There are also talks reportedly hinting at a modified version of the supply cut agreement if production in Iran and Venezuela continue to decline in the coming months and price of crude remains elevated," he said.
In terms of oil demand, he said lack of confidence continues to prevail owing to softer economic growth numbers for advanced economies, including US and the euro area.
"The Opec marginally lowered its oil demand forecast for 2019. On the other hand, the IEA although kept its oil demand outlook unchanged, it said that demand data remains mixed due to weak economic growth," he said.
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By Muzaffar Rizvi
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