Oil prices are heading for strong gains this week, and price increases are not just the result of the crisis in Venezuela.
The oil market received a boost from the US Federal Reserve this week, which signed on Wednesday that it would substantially suspend its plans to raise interest rates this year. Fed Mayor Jerome Powell said economic growth remains "solid," but the central bank had "the luxury of patience" when deciding on further interest rate increases. It's a big change from previous guidance, where the Fed very clearly outlined several interest rate increases in 2019. "19659002]" The case for raising rates has weakened somewhat, "Powell said. Slow growth in China and Europe, a weakening housing market, weak inflation ̵
The announcement contributed to strong oil price growth on Wednesday and Thursday. At the time of this letter, WTI traded in the mid-50s, with Brent over $ 62 a barrel, both close to two months high.
A more tough Fed position increases the bullish oil trend in two ways. First, lower than expected interest rates will give a shot to the economy. The stock markets rose on the news. But secondly, a weaker interest rate view also suppresses US dollars a bit. A weaker dollar stokes crude oil demand in the rest of the world, and historically, the dollar has had a reverse relationship with oil prices.
Meanwhile, the oil market received a more direct increase this week on news that Saudi Arabia slammed shipments to the United States. The United States has the most transparent and up-to-date data on the oil market, which includes weekly level outputs, imports and exports, and inventories. Such visibility is not readily available in most places around the world. Related: Has Russia made a secret nuclear power deal with North Korea?
As a result, Saudi Arabia deliberately targets this data. By reducing shipments to the United States in particular, Riyadh can help create the appearance of a tighter oil market. Saudi shipments to the United States fell by 528,000 bpd last week to just 442,000 bpd, the lowest weekly sum of more than two years.
More than finally, OPEC's production decreased by 890,000 bpd in January, according to a Reuters survey, the largest monthly decline since early 2017 (the month in which the first round of OPEC + production launches came into force). Iraq produced over its production ceiling, but apart from that, the cartel is well on its way to implementing the production constraints.
In fact, there is suddenly a remarkable mix of events that push oil in a bullish direction. First and foremost, the OPEC + production declines of 1.2 mb / d are phasing in. But beyond that, the US shale is beginning to decline, and while production is still expected to grow this year, the increase may be the smallest this year.  Then there is a power failure. Libya lost some output unexpectedly in December, with some of its output still offline. Iran's sanctions have expired in May, and the United States hopes to further cut Iran's oil exports. The new sanctions in Venezuela threaten to create yet another major source of supply failure. Related: The EU still aims to bypass US sanctions on Iran
In fact, when considering that OPEC + is determined to keep 1.2 mb / d of supply out of the market And painful US sanctions on Venezuela and Iran threaten to shut down even more production, it's pretty amazing that Brent's raw materials are only trading at $ 62 a barrel. The Fed support on interest rate hikes is the cherry on top.
Traders and investors are starting to wake up to this bullish positive. "The market is more convinced that there will be aggressive production cuts and the macro picture has improved a bit. It is positive that prices are moving forward," said Jean-Louis Le Mee, CEO of London-based oil security fund Westbeck Capital, to the Wall Street Journal.
Another investor echoes that feeling in comments on the WSJ. "The Saudi people are sincere about higher oil prices, they need to balance the budget. The OPEC cuts will lower the shares, so I'm pretty bullish, says Mark Gordon, portfolio manager at Ascent Oil Fund.
Oil prices go back to where they were in November, and significant outbreaks of Venezuela in the short term can pave the way for more price increases.
By Nick Cunningham for Oilprice.com
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