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OPEC is trying to rebalance the crude oil market - Westpac

Justin Smirk, senior economist at Westpac, explains that the crude oil reached US$85/bbl in early October but quickly corrected to a low of US$59/bbl in late November as the market realised that concerns about ongoing robust demand not being met by supply were overdone in light of rising US inventories and surging US production.

Key Quotes

“The downside risks around global growth have persisted with rising trade tensions pointing to greater uncertainty in the outlook for demand.”

“The surge in US crude production has been the key change this year. Rising 20% in the year to November, the current level of output was not expected until end 2019. Earlier this year, US producers were using higher prices to forward sell crude, providing cash to invest in production with prices supported by ample liquidity as speculators looked to short sell. The recent fall in prices has reduced forward selling thus slowing potential growth rates. Nevertheless, environmental and industry deregulation under the Trump administration has further spurred investment so it would be foolish to assume that current prices cannot support further growth in US production.”

“At the December 7th meeting, OPEC announced a 1.2mbpd reduction in output in an attempt to rebalance in the market and lift prices from the US$60/bbl level just prior to the meeting. But we also know that above US$80/bbl there is significant demand destruction and a strong incentive for US producers to boost output. The announcement lifted crude to US$62/bbl and our forecast is for US$65/bbl to be the central point out to June 2019.”

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