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Moody's looks to OPEC-plus production discipline driving crude oil price in 2019

Oil and natural gas price movement in 2019 will hinge on OPEC and Russia's commitment to production discipline, analysts with Moody's said in a Jan. 3 report.

Moody's expects the medium-term price band for West Texas Intermediate, or WTI, crude oil to be $50 to $70 per barrel, but sees continued volatility around concerns of oversupply.

"Very high Saudi and Russian production, in particular, has heightened supply volatility," Moody's senior vice president of corporate finance Terry Marshall said in a Jan. 3 global oil and gas sector report. Mixed signals on Iran sanctions and U.S. presidential pressure on Saudi Arabia to maintain high production levels add to price volatility.

However, the key concern going into 2019 is whether OPEC and Russia maintain production discipline and renew agreements to limit output, the analysts said.

In December 2018, OPEC and Russia agreed to cut production by a total of 1.2 million barrels per day from October 2018 levels, alleviating concerns about oversupply. The current production agreement expires in June.

The Moody's analysts assume a $5/bbl Brent-WTI price differential during 2019, narrowing from about $8/bbl in late 2018. The wider-than-normal differential reflected OPEC production cuts and other supply disruptions outside of North America, sanctions on Iran and increased U.S. exports, while rising U.S. and Canadian production and insufficient North American pipeline capacity had widened the WTI discount in 2018.

In the natural gas market, Moody's said the U.S. price will be supported by increased demand due to rising U.S. exports of LNG, as well as dry gas to Mexico, along with growing demand from U.S. Gulf Coast petrochemical plants, and continuing growth in gas-fired power demand.

Conversely, abundant U.S. supplies of natural gas from shale, along with rapidly increasing associated gas from shale oil production will limit natural gas values.

Moody's expects an average band of $2.50/MMBtu to $3.50/MMBtu for North American natural gas at the Henry Hub in 2019, but warned that an unexpectedly severe winter could drive storage levels below historical averages causing continued price spikes to levels above the band.