Published: Sat, January 05, 2019
Markets | By Otis Pena

Oil drops on concerns of economic downturn, but OPEC cuts support

Oil drops on concerns of economic downturn, but OPEC cuts support

Brent oil prices have declined about 38 percent since an early October peak, as concerns about potential supply disruptions in light of US -nuclear related sanctions against Iran started to sharply decline in the second half of October - after Saudi Arabia announced production increases to cover any supply decline.

In December, UAE Energy Minister Suhail al-Mazrouei, who also now serves as the president of OPEC, said both OPEC and non-OPEC members are ready to extend output cuts for another six months if the recent measures to boost the price of oil fail to boost the crude price.

But in comments that helped oil to rally, China's commerce ministry said it would hold vice-ministerial trade talks with USA counterparts in Beijing on January 7-8.

Oil's positive start to 2019 follows its worst quarter in four years and a 20 percent annual loss driven by panic over a growing glut of crude.

"Very high Saudi and Russian production, in particular, has heightened supply volatility, so whether Opec and Russia maintain production discipline and renew agreements to limit output are key concerns going into the new year", stated Wood.

Brent, the global crude benchmark, was up by 94 cents, or 1.7%, at $55.85 per barrel by 3:12 PM ET (20:12 GMT) after rallying as high as $56.30 earlier.

Production from those 11 countries is now 140,000 barrels a day below their October level, so they would need to cut about another 660,000 barrels a day to implement the agreement. The March contract traded at a discount of $8.68 to Brent.

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In North America, wide differentials for regional oil and natural gas will narrow as infrastructure coming into service in late 2019 and 2020 eases bottlenecks in the Permian Basin, western Canada and other regions, relieving stress on commodity prices, said the report.

Opec oil supply fell by 460,000 barrels a day (bbl/day) between November and December, to 32.68 million barrels a day, a Reuters survey found on Thursday, as top exporter Saudi Arabia made an early start to a supply-limiting accord, while Iran and Libya posted involuntary declines.

This has added to concerns about a slowing global economy, which weighs on prospects for oil demand. But in a market focused on total production numbers, it is US crude that is determining price direction.

In the USA, the American Petroleum Institute was said to report oil inventories at the storage hub in Cushing, Oklahoma, rose by 483,000 barrels last week. The EIA is expected to announce a drop of 3.1 million barrels in U.S.crude inventories last week, after the previous week's slide of less than 50,000 barrels. "Still, oil rebounded yesterday, shaking off the slump in equities, which is an encouraging sign". That would be a sixth consecutive weekly increase if confirmed by government data on Friday.

The majority of oil executives surveyed by the Dallas Fed are still planning to boost spending in the next year, even after a plunge in prices. Recent poor manufacturing data from China, for example, had a negative effect on the oil price since Chinese factories are a major consumer of crude.

As the new year begins, the oil market looks set to be dominated by big shifts in production.

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