Oil Monthly Forecast – December 2018

The month of November 2018 was highly bearish for US Crude Oil as price continued to decline across the month on worries of global economic slowdown which would mean low demand for crude oil owing to lack of demand and concerns of over supply owing to increase in crude oil production by major players. The first week of November was set to see US sanctions on Iranian crude oil come into effect from November 4 and as a result of constant urge from US Government many consumers of Iranian Oil had gone to look after other source while Saudi Arabia & Russia boosted crude oil production as analysts and investors had expected high demand and losing Iranian crude supply would result in huge gap in crude oil market. Meanwhile, Libya had restarted three small oil fields and added around 10,000 bpd to its oil production—which has been steadily rising over the past two months. Oil price which started on stable note for the month as surging output by the world’s three largest producers outweighed supply concerns from the start of U.S. sanctions turned out to be the greatest bane for the industry as post sanctions scenario was in sharp contrast to what was predicted and widely believed in market.

Saudi Arabia Plans to Propose Production/Supply Cut

Oil price began falling on news of US granting exception to 8 countries for Iranian crude oil import. Ahead of update of waivers, crude oil market saw a heavy decline in price action in both Brent & WTI benchmarks with Brent losing more than 16% in value since early October, while WTI has declined by more than 18% since then. Countries which received exception for Iranian crude oil imports include China, India, South Korea, Japan, Italy, Greece, Taiwan, and Turkey. As all major consumers of crude oil who can collectively be dubbed as key customers received exception and continued imports from Iran like usual, outcome turned out to be dovish with producers seeing increase in inventory and production output data which caused analysts to fear oversupply concerns as the hole in market never appeared which threatened to upset supply fundamentals in upcoming quarters despite productions cuts announced by OPEC members in June earlier this year.

However Crude Oil price began to see some level of recovery during second week of November as Saudi Arabia’s energy minister hinted at plans to reduce oil supply to world markets by 500,000 barrels per day (bpd) in December amid headlines that indicated weaker demand in key markets such as China, Japan and Germany according to their macro data. Crude Oil also gained some breathing space towards end of second week’s trading session as a report in Reuters also suggested that OPEC’s de-facto leader Saudi Arabia wanted the cartel and its allies to cut output by about 1.4 million barrels per day (bpd), which is roughly around 1.5% of global supply. While OPEC members mull over idea of production and supply cuts to adjust for a slowdown in demand growth and prevent oversupply, the executive director of the International Energy Agency (IEA) Fatih Birol called for ‘common sense’ because fresh cuts could have negative effects on the oil market stating that “Currently markets are very well supplied but we should not forget that spare capacity in Saudi Arabia is very thin, therefore cutting the production significantly today by key oil producers may have some negative implications for the markets and further tightening the markets”  which was highly at odd with public sentiment regarding crude oil price action.

Investors Await OPEC Summit Scheduled To Meet In Argentina For Directional Cues

Crude Oil price continued to decline heavily at end of third week while news hit market that the Middle East-dominated producer cartel of the Organization of the Petroleum Exporting Countries (OPEC) is considering supply cuts when it next meets on Dec. 6 on fear of glut while some members, like Iran are expected to resist any voluntary reductions. Oil prices slumped to 2018 lows while divergence between U.S. and international crude comes as surging North American supply is clogging the system and depressing prices. Overall, global oil supply has surged this year with the top-three producers namely United States, Russia and Saudi Arabia pumping out more than a third of global consumption, which stands at around 100 million barrels per day (bpd). High production comes as the demand outlook weakens on the back of a global economic slowdown. Ahead of last week of November, both WTI and Brent futures were down nearly 21%, on track for their biggest fall since October 2008. An increase in U.S. crude inventories and uncertainty in the run to an OPEC meeting next week kept markets under pressure.

Since early October fears of lack of supply followed by fears of oversupply owing to lack of expected hole in demand in key markets and rising inventories of key crude oil producers resulted in Crude Oil price losing over 30% of its market value. Just the month of November saw price of US spot crude oil go down by $14.7 per barrel (i.e., 22.09%) as price went as low as $50.60 per barrel. Investors are now focused on much-anticipated Dec. 6 meeting of the Organization of the Petroleum Exporting Countries in Argentina when Saudi Arabia, Russia & other members are expected to agree on reducing supply and cut crude oil production in order to ensure a balanced demand to supply ratio in global markets. Oil is expected to recover from yearly lows and aim to move back above $60 per barrel based on outcome of OPEC summit.