“Saudi Arabia’s aggressive strategy of pruning its output at the start of this year has been bearing fruit in proving supportive to oil prices.”
Increased pressure from President Trump on the Saudis to halt oil production cuts last week had only a temporary impact. Brent prices are currently being underpinned by several factors, including hopes of a US-China trade deal and OPEC+ production cuts, in particular. The Saudis have been aggressively cutting their production recently. With output of 10.1m barrels/day (mbd) in February, they are already below their 10.3mbd agreed target. In so doing, they are fully exploiting a window of opportunity, as US oil supply response capacity is capped due to current pipeline bottlenecks.
This context offers support for the Brent price to navigate in the USD60-70 corridor. H2 2019 is likely to prove less supportive for oil prices, as increased Permian oil export capacities may well cause the oil supply-demand balance to shift into surplus. This increased export capacity from the US is likely to prompt a change of tack by OPEC, as maintaining production cuts will prove too costly in terms of market share. As a result, there is the risk of worries bubbling up in the oil market – as they did in late 2018 – about being flooded by a glut of oil.