Sanctions buoy oil, but growth concerns are likely to cap gains

Singapore — Oil prices rose on Tuesday amid Opec-led supply cuts and US sanctions against Iran and Venezuela, although analysts expect surging US production and concerns over economic growth to keep markets in check.

US West Texas Intermediate (WTI) crude oil futures were at $52.78 a barrel at 3.29am GMT, up 37c, or 0.7%, from their last close.

The ongoing closure of parts of the Keystone pipeline that brings Canadian oil into the US also helped prop up WTI, traders said.

International Brent crude futures were up 50c, or 0.8%, at $62.01 a barrel.

Analysts said markets are tightening amid voluntary production cuts led by producer cartel Opec and because of US sanctions on Venezuela and Iran.

But some said supply-side risks were not receiving enough focus.

“We believe that oil is not pricing in supply-side risks lately as markets are currently focused on U.S.-China trade talks, ignoring the risks currently in place from the loss of Venezuelan barrels,” US bank JP Morgan said in a weekly note.

Should US-China talks to end trade disputes between the two nations have a positive outcome, the bank said oil markets would “switch attention from macro concerns impacting future demand growth to physical tightness and geopolitical risks impacting immediate supply”.

With Opec engaged in supply management and the Middle East entangled in political conflicts while production outside the group surges, Bank of America Merrill Lynch said Opec’s global market share would fall as its outright output drops to 29-million barrels a day in 2024 from 31.9-million barrels a day in 2018.

Growing US supply and a potential economic slowdown in 2019 could cap oil markets.

“The worries of oversupply stemming from the US will likely remain a dominant theme as we approach the warmer months,” said Edward Moya, market analyst at futures brokerage Oanda.

US bank Morgan Stanley said the surge in US crude oil production, which tends to be light in quality and which rose by more than 2-million barrels a day last year to a record 11.9-million barrels a day, had resulted in overproduction of petrol.

“Light crudes naturally yield more [petrol], and together with relatively modest demand-growth, this has driven [petrol] stocks sharply higher and crack spreads sharply lower in recent months,” Morgan Stanley said.

Refining profits for gasoline have plunged since mid-2018, going negative in Asia and Europe, amid tepid demand growth and a surge in supply.

As a result, Morgan Stanley said “low refining margins and weaker economic data means oil prices can rally only so much [and] we continue to see modest upside for Brent to $65 a barrel in the second-half [of 2019]”.

Bank of America also warned of “a significant slowing in growth globally”, adding that it expected Brent and WTI to average $70 a barrel and $59 a barrel respectively in 2019, and $65 a barrel and $60 a barrel in 2020.

Reuters