Oil prices this month touched the highest levels of the year, but the market now faces a number of key tests.
Production cuts by the Organization of the Petroleum Exporting Countries and its allies, and U.S. sanctions on Venezuela and Iran have worked to tighten global crude supplies, and violence in Libya threatens to cut off the flow of even more oil. Those factors contributed to a 41% jump in U.S. benchmark crude prices and a 34% increase in global benchmark Brent crude in 2019 as of Thursday. West Texas Intermediate crude CLK9, +0.38% settled at $64 a barrel on Thursday, while Brent LCOM9, +0.
The $33 billion deal “refocused the energy markets on the U.S. shale industry…and Russia took notice as the nation’s finance minister [recently] mentioned concerns about market share,” says Tyler Richey, co-editor at Sevens Report Research. At the same time, the rebound in oil prices may “help domestic output accelerate into the summer months, as [exploration and production] projects become more financially appealing.
In a December commentary in the Financial Times, Alhajji wrote that it’s “not the type demanded by the world’s oil refiners,” which are equipped to handle heavier crude grades. The market has “already hit a refining wall in the U.S.,” he says. Once crude quality begins to limit the growth of U.S. shale output, “we will end up with lower oil supply and higher oil consumption,” says Alhajji.
Traders will also keep an eye on the prospects for oil demand. Earlier this month, the International Monetary Fund cut its global growth forecast for the third time in six months.
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