Oil Price Fundamental Daily Forecast – Production Cuts Generating Surge in Brent Futures

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures are trading mixed early Monday with the price action reflecting the OPEC-led decision on Friday to trim production by 1.2 million barrels per day (bpd) starting in January 2019. Helping to put a lid on the markets is fear of a global economic slowdown. Uncertainty over future demand is also being fueled by worries over a possible escalation of the trade dispute between the United States and China.

At 0750 GMT, February WTI crude oil is trading $52.81, up $0.01 or +0.02% and February Brent crude oil is at $62.14, up $0.47 or +0.76%.

Prices recovered from early weakness on Friday after OPEC and a few Non-OPEC major exporters including major producer Russia announced they would trim the oil supply by 1.2 million barrels per day in an effort to reduce supply and stabilize prices.

OPEC members are expected to reduce production by 800,000 bpd while non-OPEC producers are expected to reduce output by 400,000 bpd.

In other news that could determine future demand, Japan, the world’s third biggest economy and number 4 oil consumer, on Monday revised its third quarter GDP growth down to an annualized rate of -2.5 percent, down from the initial estimate of -1.2 percent.

Chinese purchases for strategic reserves and by new refineries, jumped an annualized 8.5 percent in November to 10.43 million bpd. This was the first time its imports topped 10 million bpd.

Forecast

Brent is trading much higher than WTI crude because the production cuts affect Brent supply with the U.S. choosing not to participate in the output cuts.

The production cut news is potentially bullish but they did come in at the middle of the range. Going into the OPEC meeting, traders were looking for production cuts to range from 1.0 million bpd to 1.4 million bpd. Therefore the rally has been a little muted.

Also keep a lid on any rallies at this time is concerns over the trade dispute and a possible global economic slowdown.

So while the production cuts are likely to underpin the markets over the short-run, it may take a surprise event like a supply disruption to trigger a breakout to the upside.