181210 us shale
US shale doesn’t need Opec cuts to keep on growing Image Credit: AP


Oil markets would be in a more tighter position in 2019 than it is today on the supply front on expectations of lower output from Opec plus countries along with falling production in Canada and the United States, according to UBS’ analyst Giovanni Staunovo.

The Opec plus countries decided to cut output by 1.2 million barrels of oil per day (mbpd) from January for the next six months and will review the situation in April. They decided to give exemptions to Iran, Libya and Venezuela.

“We expect Iranian and Venezuelan output to fall further over the coming months, so Opec’s share of the cut could actually exceed 0.8 mbpd,” Staunovo said in a note. Currently Opec producers will shoulder 800,000 barrels per day of cuts and the remaining will be borne by Russia and its allies.

Elsewhere, Staunovo expects Canadian production to decline by another 100—150kbpd in January following government-mandated cuts in Alberta, and he expects USTh pipeline constraints to slow US crude production growth in the coming months.

We expect Iranian and Venezuelan output to fall further over the coming months, so Opec’s share of the cut could actually exceed 0.8 mbpd.

- Giovanni Staunovo, UBS analyst

The supply constraints would give underlying support to prices that may recover to $70-80 (Dh257-Dh294) per barrel from $61 on Monday, according to UBS and Bank of America Merrill Lynch. Before the deal was struck, oil markets was in total disarray after prices fell from a high of $86 per barrel on concerns on oversupplies in the market. Oil prices have been on a recovery mode after the deal.

Brent futures have started to trade at a contango because demand has propped-up after the massive sell-off seen in the past two months. The market was in backwardation earlier because traders shied away from high prices,

“As Opec+ removes excess barrels, we see front-to-third month timespreads for Brent swiftly moving into backwardation. Still, the surge in US supply in recent months should be a reason for caution,” BoAML said in a report led by Francisco Blanch and others.

Brent for February delivery on the Intercontinental Exchange traded at $61.70 on Monday, at a premium of 15 cents compared to March delivery, meaning that market is in contango currently. Analysts feel that the current trend of contango may be for short-term, as the markets are again expected to move in backwardation.

“When we have a sustained rally in Brent, we may move back in backwardation because the commitments for the far-month contracts may start waning,” said Pradeep Unni, head of trading, Richcomm Global.