Oil Prices Have Rallied From Their December Low. What Can We Expect Now?
Since February, OPEC has cut production by 570,000 barrels per day. This has led to both Brent and WTI rallying in recent months. In our previous article we had provided a range of scenarios that we felt were key if oil prices were to find a bottom, with OPEC cutting production being the main driver for oil prices stabilizing.
You can use our interactive dashboard Our Oil Outlook – 2019 to modify key drivers and visualize the impact on our oil price estimate.
OPEC Production hits a 4-year low:
With Saudi Arabia over-delivering on its production cut, and Venezuela facing a political blackout, which then has led to lower production of its oil, oil prices have rallied in recent weeks. This has meant that Brent averaged $64 in February, and WTI averaged $59. We expect that with the cuts and total global production coming in at 101.5 million Bp/d, this against a demand for 101.3 million Bp/d, that oil will remain rangebound in the $63-65 range, with WTI averaging $6-9 lower than Brent.
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How could oil head to $70 per barrel?
Shale:
Estimates put total US production at an average of 12.3 million Bp/d in 2019, with the Permian region contributing to most of the production. With the cost of drilling becoming increasingly more expensive, we estimate shale production will eventually be forced to settle at 11 million Bp/d. This is 1.3 million barrels lower than the currently expected level of production. We believe this could send Brent prices up to $70 per barrel and WTI to $62-63.
Could the Saudis drop the dollar?
With geopolitical tensions, the Saudis have warned that they could drop the dollar as the primary currency of settlement, should U.S legislators proceed to introduce legislation to hold OPEC liable for cartelization. We believe the subsequent fallout could drive the price of oil to $100 a barrel, or above. Although it should be noted, though, that we don’t find this scenario plausible.
The Fed Put:
The dollar index (DXY), has been trading at around 97, in 2019. We believe that with the Fed reducing the rate of balance sheet reduction, and scaling back its pace of interest rate hikes, this could send the dollar lower and the price of oil higher.
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