Brent is expected to average $75 per barrel for 2019, trending at a bullish monthly average of $77 per barrel for the second half of the year, according to Fitch Solutions.
A tightening of supply and the assumption of a high level of compliance by the Opec+ alliance in the first half of the year, are some of the factors supporting the ratings agency’s fundamentally bullish outlook for the oil markets.
"Saudi Arabia is shouldering the bulk of the cut and, as of February, will have removed around 1 million barrels per day of supply from the market. As with the previous round of cuts, this will offset softer compliance elsewhere in the group,” Fitch said.
Brent futures recovered early this year, trading at $63.09 per barrel on Monday after plunging to $50.47 per barrel in December, ending a three-year buoyancy in prices, which peaked at $86.29 per barrel in October. The Opec+ alliance led by Saudi Arabia and Russia pledged at the exporter group’s annual meeting in Vienna in December to stop the decline by undertaking 1.2 million bpd of production cuts starting January.
The alliance’s supply cuts as well as the crisis in Venezuela has tightened the market, allowing prices to recover over the past couple of weeks. Sanctions have reduced Venezuela's output to about 1 million bpd. The country used to produce about 3.5 million bpd two decades ago.
Fitch maintains the bullish outlook well into 2020, where it has forecast an annual average of $82 per barrel for Brent, $84 per barrel in 2021 as well as $85 through 2022 and 2023 for the benchmark.
"Adding to this are the impacts of US sanctions on Venezuela and Iran, which will substantially curtail exports across the year, tightening the physical market,” the report said.
"A more hawkish approach by Washington could further move the needle on the prices. However, with fiscal stimulus waning and trade tensions lingering, it is unlikely that the government will risk piling added pressures onto the US consumer. Incumbent President Donald Trump will seek re-election in 2020 and gasoline prices are a key voting issue in the states,” it added.
However, while the collective curbing of supply by the Saudi-Russian alliance is likely to tighten the market, the agency warned of an annual addition of 1.4 million bpd of crude, condensate and natural gas liquids from the US shale basins hitting the market this year. Shale production is forecast to remain strong over the coming five years but Fitch cautioned that the pace of growth of US unconventionals will taper.
“This reflects the limits to efficiency gains and productivity improvements, reduced options for asset high-grading, higher services costs and a shift in focus by key producers from growth to margins,” Fitch said.
The US Energy Information Administration has forecast US production to surge beyond 12.1 million bpd this year, having already overtaken top sovereign producers Saudi Arabia and Russia by peaking at 11.9 million bpd towards the latter half of 2018.
Fitch maintains annual outlook for West Texas Intermediate at $69 per barrel for 2019, and expects the North American crude benchmark to rise to $76 and $78 in 2020 and 2021. The agency has also forecast WTI to hit the $80 per barrel mark through 2022-23.
In an interview with The National, Vicki Hollub, chief executive of Occidental Petroleum, the biggest producer in the Permian basin – the largest US shale basin – said for US unconventionals to maintain output momentum an "optimal" price band of $60 to $70 per barrel would be required in 2019.