Oil Monthly Forecast – January 2019

Crude Oil was one of the financial instruments which suffered great loss during 2018. While the early half of 2018 was positive for oil price in broad market, the later half proved to be a disaster.  The second half of 2018 saw slowdown in global growth owing to trade wars initiated by US President Trump against China, Europe and other allies. This combined with ongoing fed rate hikes, hiccups in the German car industry, Brexit concerns and Iranian sanctions greatly impacted supply & demand of Crude oil in broad market ensuring a bearish phase. Another factor was the slippage of the OPEC / Non-OPEC deals, with lower discipline among members. Russia reached record post-Soviet production with 11.3 million barrels per day. All in all, supply growth outpaced expectations by around 2.5 mbpd, against an outpace of 2 mbpd forecast in July. President Trump’s decision to first enforce zero imports from Iran and later allowing eight major consumers of oil in world to continue their crude oil trade with Iran, greatly resulted in Crude price falling sharp across broad market. As Saudi, USA and other producers increased their production to meet demand forecast post Iran sanctions a waiver to major crude import markets created a glut scenario which has now escalated to huge stockpile in all major exporters in excess of demand amid slowdown in global economic growth which will decrease consumption of crude oil causing glut scenario to extend for prolonged time frame.

News of Production & Supply Cut From OPEC Summit Failed To Improve Oil Price

While OPEC + members met and agreed to cut production and output from January 2019 providing temporary reprieve to market, concerns of glut scenario continued to dominate as consecutive weekly readings saw US inventories and output rise sharply and breach historic levels to be named highest producer in world for short while beating even Saudi Arabia’s readings. Meanwhile other members also continued to increase their inventory readings ahead of January 2019 which has now led investors to believe that the planned reduction of 1.2 million barrels per day from January 2019 is unlikely to have any major impact on crude oil price in broad market. As 2018 came to close, all major and developing economies across globe are experiencing significant slow down in economic growth following sharp increase during 2017.

However US President Donald Trump wants to keep crude oil price at bare minimum and continues to blast OPEC for their move to reduce supply. In order to keep price capped to minimum levels production has been greatly boosted in USA. US shale is the big swing player. The production in the Permian Basin, North Dakota, and other places suffered from some bottlenecks due to increased supply for now but once these bottlenecks are resolved, US production is set to surpass 12 mbpd. After the historic crash in oil prices in late 2014, the US industry adapted. While some companies went bust, productivity improved to meet lower prices and output emerged from the lows and reached new records. While lower price and lower volatility owing to limited demand remains our primary concerns, oil market could always be in for a surprise.This is because a significant chunk of the black gold still comes from unstable countries and with ongoing geo-political and economic issues markets could see increase in price at any point of time.

Positive Outcome in Sino-U.S. Trade Negotiations Could Boost Oil Price & Demand

However overall picture for 2019 still remains murky when it comes to crude oil as three big players in oil production Russia, Saudi Arabia, and the US continue to produce at similar levels and are responsible for around 40% of global output. When prices rise, more rigs come online to meet demand, consequently depressing prices. When prices fall, the non-profitable platforms are shut down quickly, lowering supply and hence pushing prices back up. This flexibility in production is set to limit volatility. However increased dominance of US in oil market continues to grow and this will greatly impact above mentioned flexibility as Shale production using fracking is much more flexible owing to cheaper operation costs of US rigs when compared to Middle Eastern and Russian counterparts. Overall short term forecast for crude oil is bearish as both International Energy Agency (IEA) and OPEC hints at possibility of glut in oil market for minimum of first half of 2019 despite changing their forecasts from earlier in the year to reduced levels owing to existing demand and supply scenario. On the rare chance that China & US manage to negotiate a proper trade deal during their meeting later this month, oil market could resume bullish action over increased demand from Chinese markets widely considered biggest importer of crude oil.  When looking from technical perspective, a sharp fall below $50 handle and subsequent range bound action in $40 to $45 price range has caused RSI indicator to enter oversold region below 30 but momentum indicator still hints at continued downside move. As long as the pair continues to trade below $50 mark, crude oil market will continue to experience strong bearish pressure.