Oil Rises as Saudi Plans to Cut Exports; Long-Term Price Forecast Still Mediocre

Oil prices rose sharply on Monday, buoyed by speculation that Saudi Arabia is planning to curb petrol exports in a further attempt to balance the market. The OPEC kingpin is looking to bring crude back toward $80 a barrel to have any semblance of a balanced budget this year.

Crude Rallies

U.S. crude extended its recovery to five days on Monday, with the West Texas Intermediate (WTI) benchmark reaching a high of $49.79 a barrel on the New York Mercantile Exchange. The U.S. futures contract was last seen trading at $49.26 a barrel, up $1.30, or 2.7%.

Brent crude, the international futures benchmark, notched a session high of $58.93 a barrel for its sixth consecutive gain. It was last seen hovering at $57.99 a barrel, having gained 93 cents, or 1.6%.

Commodity markets were aided by a sharp drop in the U.S. dollar at the start of the week. The U.S. dollar index (DXY) fell 0.5% against a basket of currencies to reach 95.72.

Saudis Keen on $80 a Barrel Oil

Saudi Arabia is planning to reduce oil exports to 7.1 million barrels per day in January as part of a broad effort to rebalance the market, The Wall Street Journal reported Monday. That represents a cut of 800,000 barrels per day from November levels. These efforts go hand-in-hand with a decision by OPEC+ in December to reduce production by 1.2 million barrels per day.

The Saudis would like to bring crude prices back to $80 a barrel, the level identified in its 2019 budget, to cover a surge in government spending. Riyadh plans to increase government spending 7% this year. Astonishingly, the budget blueprint assumes a 9% increase in revenue despite massively drop in oil prices in the fourth quarter. According to Ziad Daoud of Bloomberg, the forecast “defies the laws of arithmetic.”

Saudi Arabia wields tremendous power in the energy market but its days of manipulating prices almost singlehandedly are over. The period since the oil-price collapse of 2014 has highlighted the extent to which low-cost producers in the United States have been able to take market share from traditional players. The United States is not only the world’s biggest energy producer, its shale-fracking sites have achieved tremendous efficiency gains in the last five years.

Against this backdrop, Goldman Sachs forecasts only a slight recovery in crude prices this year. The Wall Street mega bank expects WTI to average just $55.50 a barrel in 2019. Brent is expected to see an average price of $62.50 a barrel. Prices are then expected to decline somewhat in 2020.

As per WSJ, Goldman says:

“We expect that the oil market will balance at a lower marginal cost in 2019 given: (1) higher inventory levels to start the year, (2) the persistent beat in 2018 shale-production growth amidst little observed cost inflation, (3) weaker than previously expected demand growth expectations (even at our above consensus forecasts) and (4) increased low-cost production capacity.”

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Chief Editor to Hacked.com and Contributor to CCN.com, Sam Bourgi has spent the past nine years focused on economics, markets and cryptocurrencies. His work has been featured in and cited by some of the world's leading newscasts, including Barron's, CBOE and Forbes. Avid crypto watchers and those with a libertarian persuasion can follow him on twitter at @hsbourgi