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Analisi 28.02.2019

Oil market review

Oil market review

Oil prices are up more than 23% year to date, with WTI increasing by more than USD 11 in under two months, reaching USD 56 towards the end of February.


  • The rally came as investors gauged OPEC’s effectiveness at keeping their promise to trim production by 1.2 mbd (using October’s numbers as a benchmark).
  • While the announcement was met with a lot of scepticism at the time, OPEC supply numbers according to Bloomberg showed a 1.5 mbd decrease between December and January, triggering the strong WTI rally and proving OPEC’s ability to deliver on their promises. So far, the implementation of the recent cuts is mirroring those cuts announced in November 2016 and implemented in 2017, when oil prices increased by more than 30%. It is clear that OPEC and its allies are trying to alleviate the downside pressure on crude prices by tightening supply while avoiding a market shortage. OPEC also has to manage President Donald Trump’s efforts to control prices.
  • It is important to note, however, that a portion of the production decrease by OPEC was unplanned, with an unintended 400,000 barrel decline in production on the part of Iran, Libya, Nigeria and Venezuela. Looking at Venezuela, despite its relatively low output and despite the world’s demand for heavy oil, the country is being forced to reduce production, as buyers are reluctant to take its “US-sanctioned” oil.
  • While investors have been focusing more on the possibility of supply tightening, the sensitivity of oil prices to global demand remains high and the threat of a slowdown in Chinese oil demand, coupled with the uncertainty surrounding the China–US trade war, should continue to fuel volatility on the commodity. Even though Trump recently announced substantial progress in trade talks, he might draw out any resolution of the issue, preventing a drop in price volatility.
  • Looking at oil companies, despite the fact that Q4 is historically the worst-performing quarter for the energy sector, Q4 2018 results were quite different, with most companies beating expectations on major key figures. European supermajors – our preferred subsector – showed strong cash generation and solid de-gearing of balance sheets, while maintaining strong positive momentum on dividend growth and share buybacks. Cash flow generation, CAPEX control and dividend growth should continue to be the dominant themes for European supermajors in 2019.
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Pierre Melki
Equity Analyst Advisory Services

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