Crude oil rally driven by fundamentals: Fitch

Brent's rally above $80 per barrel is fundamentally justified, and further tightening on the supply side will lend continued support to prices, noted a report by Fitch Solutions Macro Research (a unit of Fitch Group) on Monday.

Sentiment towards oil continues to improve and has been a major factor driving prices higher, Fitch report noted, adding however that rising macro risks and extreme bullish positioning pose some risk to the downside.

Noting that spare capacity has dropped sharply in recent months, the report adds, “At the peak of the deal, OPEC and Russia removed upwards of 2.0 million bpd of production. As of August, this had dropped to around 1.4 million bpd, of which we calculate less than 250,000 bpd can be viably returned to market this year.”

Venezuelan output continues to tumble, while the full impact of US sanctions on Iran has yet to be felt.

In addition, the report adds, a number of markets outside of OPEC are growing their production - including Brazil, Canada, North Sea and FSU - but the pace of greenfield additions has begun to slow. Added to this, output growth in the US - the main source of supply growth ex-OPEC - is being subdued by pipeline constraints in the Permian.

“Spare capacity in the Middle East and Russia will not, according to our data, be sufficient to prevent a significant tightening on the supply side over the coming quarters,” the report noted.