Investors Doubt OPEC Cuts Can Boost Oil Prices
December 16 2019 - 8:29AM
Dow Jones News
By Sarah Toy
Easing trade tensions and production cuts by the Organization of
the Petroleum Exporting Countries have boosted oil prices recently,
but some investors remain dubious that even those long-awaited
developments will be enough to push crude beyond its recent trading
range.
U.S. crude prices hit a three-month high on Friday after the
U.S. and China signaled they had reached a limited trade agreement
that helped ease investors' worries that slowing global growth
would hurt demand. A week earlier, OPEC and its Russia-led allies
agreed to new crude-production cuts, which also boosted prices.
Yet both rallies quickly stalled. Optimism about the trade pact
fizzled Friday afternoon, with U.S. crude prices paring gains from
earlier in the day to settle up 1.5% for the week at $60.07 a
barrel. And some doubt that the OPEC cuts -- which would hold back
a total of around 1.7 million barrels a day from global oil markets
and deepen the current curb of 1.2 million barrels a day -- will
meaningfully reduce global supplies in the coming year.
While those production cuts could boost oil prices in 2020, some
energy experts are skeptical about whether they will. Saudi Arabia
agreed to reduce output by 167,000 barrels a day to 10.151 million,
but the kingdom already produces an estimated 400,000 barrels a day
less than its previous quota. And some OPEC members, including
Nigeria and Iraq, have struggled with curbing supply, making it
difficult to gauge how effective the cuts will be.
"Why would they change next year just because they made a
pledge?" said Giovanni Staunovo, commodities analyst at UBS Global
Wealth Management.
Oil prices remain well below their April highs, weighed down by
concerns of oversupply and waning demand caused by slowing global
growth, even after the initial trade agreement between the U.S. and
China eased some growth worries.
"The upside to prices is limited," said Robert Yawger, director
of the futures division at Mizuho Securities USA. "There is just so
much supply out there."
OPEC and the U.S. Energy Information Administration signaled
Wednesday that global oil supply would likely remain robust going
into next year. The cartel left its world oil-demand growth
estimates for 2019 and 2020 unchanged and forecast that non-OPEC
supply would stay strong next year. The same day, the EIA reported
another weekly rise in domestic crude inventories, defying
analysts' predictions of a drawdown and marking a sixth week of
increases out of the past seven.
Rob Thummel, senior portfolio manager at the energy investment
firm Tortoise, said it is slowly moving its investments -- still
largely in oil and gas -- toward global electricity providers and
infrastructure. Neither the OPEC cuts nor the trade deal has
persuaded the firm to pull back on that, he said.
"It didn't change our investing perspective and how we're
positioning our clients," he said. "Nothing caused us to change our
mind and catapult oil-demand growth to the top of our list in terms
of investments we're planning on making."
He also noted the relatively brief duration of the OPEC cuts.
"If OPEC really wanted to boost prices, they should have run the
cuts through the entirety of 2020," he said. "The fact that they
are re-evaluating in March -- that's causing some uncertainty."
For others, the OPEC cuts and trade deal signal a strong year
ahead for oil prices.
"The deal is very constructive for oil prices looking into 2020,
especially when combined with the very firm backing from OPEC,"
said Gary Ross, chief executive of Black Gold Investors LLC, who is
betting on exploration-and-production companies.
Another bullish sign, according to Mr. Ross: a postelection
surge in the British pound that is weighing on the U.S. dollar. Oil
is bought and sold in the U.S. currency, so oil prices often move
in the opposite direction of the dollar.
Net bets on higher U.S. crude prices by hedge funds and other
speculative investors jumped to their highest level since May
during the week ended Dec. 10, Commodity Futures Trading Commission
data show. Net bullish bets, however, are still well below their
April peaks.
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Write to Sarah Toy at sarah.toy@wsj.com
(END) Dow Jones Newswires
December 16, 2019 08:14 ET (13:14 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.