Home / Markets / Mark To Market /  The impact of supply cuts extension by OPEC and friends

Brent crude oil prices were only marginally up in Wednesday morning trade. Clearly, prices have failed to recover from the 4% drop seen on Tuesday, when the Organization of the Petroleum Exporting Countries (OPEC) and its allies (together known as OPEC+) decided to extend their supply cuts. Collectively, OPEC+ will curb production by 1.2 million barrels per day (mb/d) for nine months until 31 March.

Shouldn’t lower supply boost prices? As it turns out, the markets were largely anticipating this outcome. Moreover, investors seem worried about the muted demand outlook this time around. “Although the OPEC meeting took a strong stance to keep markets balanced and push prices higher, demand concerns are playing a larger role this time and keeping prices from rising sharply," said an analyst who did not wish to be named.

Ritesh Jain, a global macro investor, said restricting supply will obviously support prices if global economic growth is good. “However, economies are weakening everywhere. If growth is slowing down in US, Europe, India and China, the best these cuts will achieve is maintain current price levels," added Jain.

According to CARE Ratings, “Given the current state of the world economy, oil demand for 2019 is slated to grow by 1.14 mb/d, whereas non-OPEC supply in 2019 is expected to grow at a robust pace of 2.14 mb/d, year-on-year."

Needless to say, if demand slows down further over the medium term, prices could come under pressure. A prolonged US-China trade dispute is anticipated to weigh on oil demand prospects, as economic growth gets affected. Additionally, investors would do well to watch production momentum from the United States while also monitoring rising tensions between US and Iran. “As the US stand-off with Iran continues, so will speculation. This will have a varying effect on oil prices, depending on how tightly balanced the market is at the time," said Ann-Louise Hittle, vice president-macro oils, at Wood Mackenzie, a global natural resources consultancy.

According to Jain, unless there is disruption in flow of oil or US production comes off, prices cannot go much higher.

CARE Rating believes the price of Brent will range between $63 and $68 per barrel in the coming few months. Wood Mackenzie expects Brent to average $68 per barrel for 2019 as a whole, and $69.50 a barrel in the second half of 2019.

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