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The drop in oil prices has halted, at least temporarily, after Saudi Arabia announced that cuts in OPEC production would still remain a little longer.
"We will do what is necessary to maintain market stability beyond June. For me, this means reducing stocks to their current high levels, "said Saudi Energy Minister Khalid al-Falih, according to Arab News. He said that Saudi Arabia "would do what is necessary" to maintain stability.
Oil prices have fallen more than 13 percent in the last two weeks, a drop that Al-Falih has described as "unjustified". He added that "a consensus was emerging among the OPEC countries + to continue their efforts towards market stability in the second half of the year."
Asked about the escalation of the trade war between the United States and China, as well as on the prospect of a new trade war between the United States and Mexico, and on the consequences of the war. a global economic downturn on oil demand, al-Falih acknowledged the negative impact. "But you can be sure that we will be receptive," he said.
The comments reinforce the likelihood that OPEC + will postpone production cuts at its meeting in Vienna in a few weeks, thus extending the supply contract for the rest of the year. The trade war, the failings of the world economy and the questions of demand make the choice relatively easy.
The bearish market reversal comes as Saudi Arabia added a bid in May to offset declines attributable to Iran. According to Bloomberg, Saudi Arabia reportedly added 170,000 b / d in May, while Iran reportedly lost 230,000 b / d. Smaller increases in Libya and Iraq completely offset the Iranian outages, which partly explains why the oil market slowed in May, despite the US "maximum pressure" campaign. on Iran. At the same time, Russia has unintentionally reduced by 76,000 barrels per day the contamination crisis along the Druzhba pipeline. Related: Oil is in free fall since November
Saudi Arabia, however, remains below its production limit under the agreement with OPEC +, and Riyadh has been much more cautious in injecting more oil into a market. losing speed. It has always been difficult for Russia, more eager to increase production, to convince Saudi Arabia to abandon the production cuts following the collapse of last year. But the most recent one means that the possibility for OPEC + to release cuts has been considerably reduced.
"While restrictive fundamentals have supported oil prices until mid-May, the intensification of trade wars and weaker activity indicators have finally caught up with the sentiment of the oil market," wrote Goldman Sachs in a note. Declines in the past two weeks have probably been magnified by technical trading as speculators have become overexploited. The liquidation of speculative positions probably contributed to the speed of the sale.
So where are we going from here? The OPEC + will probably keep the cuts in place, which could prevent a total glut and avoid a deeper slide. Supply disruptions, the prospect of further losses in Venezuela, Iran and Libya will also mitigate any surplus. Goldman Sachs says prices "can go up from here", albeit with increased volatility. The big question now is what impact the trade war will have on demand and, more broadly, on the slowdown in the global economy. Related: Iraq's ambitious oil plan faces major problem
The investment bank said three major factors were "misguided developments" in the oil market: "Permian decongestion, the supply response of low-cost producers and the change in the regulation of bunker sulfur by IMO by 2020 ". Production capacity along the US Gulf Coast is expected to "lower the overall marginal cost of production," Goldman analysts said. The addition of the new US offer and its integration into the global market should reduce the difference between WTI and Brent. Ultimately, this represents "a multi-year threat to the market share and income" of OPEC + producers. As a result, Goldman sees Brent fall from $ 72.50 in the second quarter to $ 65.50 in the third quarter, then to $ 60 a barrel next year.
The prospect of an increase in shale production in the United States and a weakening of demand resulting from trade wars does not augur well for oil prices. In the short term, however, cuts in OPEC + production should help prevent a much deeper slowdown.
By Nick Cunningham from Oilprice.com
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