Oil up almost 2% on OPEC cuts, USA sanctions

Crude Oil

Brent crude futures have risen 20 percent in 2019 to around $63 a barrel, but most of that increase took place in early January. The supply cuts, which also include Russian Federation and nine other non-OPEC producers, took effect on January 1.

Oil Storage Tanks at Cushing, OKThe global oil market will struggle this year to absorb fast-growing crude supply from outside OPEC, even with the group's production cuts and USA sanctions on Venezuela and Iran, the International Energy Agency said in a report on Wednesday.

Hopes of a US-China trade deal have lent extra oxygen to crude oil prices in past sessions and this should remain a key driver in the very near term.

The moderate growth is reportedly tied to the voluntary output cuts led by the Organization of the Petroleum Exporting Countries (OPEC) and its non-OPEC allies.

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The U.S. administration likely calculated any fallout from sanctions on oil prices would be small given the limited volumes of crude involved and the expectation that the standoff would be resolved quickly.

The oil price has risen by 20 percent so far this year, yet most of that increase came in early January, before the imposition of US sanctions on Venezuela's energy sector. American supply growth this year will exceed Venezuela's total output, the IEA said, another signal that OPEC's efforts to buoy prices may ultimately prove self-defeating.

"The imposition of sanctions by the United States against Venezuela's state oil company Petroleos de Venezuela (PDVSA) is another reminder of the huge importance for oil of political events", the IEA said.

Heavy crudes are much harder to refine and tend to contain significant quantities of sulfur and other impurities that are costly to remove, which is why they sell at a hefty discount to medium and light oils.

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If refiners are unable to source enough heavy and extra heavy crude, they will buy the next best alternative, in this case medium density crudes, so the impact of sanctions is rippling through the entire oil market.

The oil price has risen by 20 percent so far this year, yet most of that increase materialised in early January, before the imposition of United States sanctions on Venezuela's energy sector. Analysts were looking for a build of 508,000 barrels for the week.

"Oil prices have not increased alarmingly because the market is still working off the surpluses built up in the second half of 2018, when global supply is estimated to have exceeded demand by 1.3 mbd", said the IEA. In the meantime, the markets seem well supported with buyers just waiting for any signs of increased demand.

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