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TD Securities analysts point out that Brent crude has surged by as much as 50 percent from their late-December lows, since it became apparent at the end of last year that the OPEC+ group of oil producing countries will keep their promise to maintain their commitment to reduce output by 1.2 million b/d for as long as it is necessary to rebalance the market.

Key Quotes

“Even taking Thursday’s selloff into account, the Brent market is still some 35 percent above those lows. Prices rallied sharply as traders and CTAs covered shorts following the December carnage, in turn lifting net length in response to firming expectations that the global crude market would shift from a surplus to a deficit during the next twelve months.”

“The tightening market balances, while at risk from the US-China trade woes, are still in the cards given that OPEC + producers seem ready to cut supply in order to achieve their revenue goals. Indeed, the fact that the Brent curve is in such a steep backwardation lends strength to the view that the global market remains tight. Plus at this stage, technicians and CTA trend followers positioning does not imply a further tilt toward a sharp increase in short exposure.”

“Given that Iran has reduced exports from 2.5 million b/d to just 0.86 million b/d, as a result of US sanctions, continued Venezuelan and Libya risk (owing to internal conflicts which may impact oil producing areas) all help to give us comfort that the crude market will not move into a material surplus. There should also be a risk premium of at least few dollars, as there is a real risk of intentional or accidental conflict between the US and Iran, which could interrupt the flows of some 17 million b/d through the Straits of Hormuz.”

“Despite the very aggressive talk from the White House on the China trade file, a solution may materialize very quickly should both parties decide that a full blown trade and technology war is too costly. Finally, the resulting lower interest rates in the US and through the world following the recent risk market sell-off, and the strong possibility of new Chinese fiscal and monetary stimulus should also help stabilize energy.”