Oil: More upside – TDS

TD Securities analysts point out that the WTI crude broke out to a four-month high last week, which clawed back slightly over half of the $34.45 loss posted between October and December of 2018, while at the same time, the WTI to Brent spread narrowed in response to slowing US production growth and an unexpected 3.86 million bbl US inventory drop.

Key Quotes

“The firm consensus opinion, which includes the IEA, the EIA and OPEC, showing that global demand is on target to grow some 1.4 million b/d in 2019 has convinced traders that the crude market will move into a deficit in the coming months.”

“With the Federal Reserve and other central banks unlikely to attempt to tighten policy further during this cycle, a US-China trade deal becoming a reality later in the year and Chinese authorities signalling the willingness to support the economy as needed, the demand environment looks set to recover.”

“Add to this strong signals from OPEC+ that it is ready and willing to increase compliance to its 1.2 million b/d worth of cuts initiated earlier in the year, which includes Russian commitments to reduce supply by some 300k b/ d, it should be no surprise that crude has moved close to our formal $60/bbl forecast ($70/bbl Brent).”

“Indeed, as crude demand has not yet seen much impact from slowing global growth, while OPEC+ suggestions imply that it may even cut more that its current 1.2 million b/d commitment and risks grow that Venezuela/Iran will reduce supply faster than expected, crude prices could for a while move above our targets.”

“Any disappointment on the US shale front could also be a trigger for a rally higher. Faster-than-expected inventory declines and additional deterioration in Iranian/Venezuelan exports may well bring WTI toward $64/b and Brent near $73/b.”

“However, these price levels are unlikely to be sustained in the long term, as investment levels have started to creep higher and should jump significantly given the current firm price environment. However, OPEC+ will likely manage its production cuts as it seeks to keep the market in balance and reduce incentives from nonconventional producers to grow output too much. This implies that any near-term price spike should be locked in by producers.”