U.S. crude oil prices hit the lowest in 18 months in the last week of 2018, having slumped by nearly 40 percent from four-year highs hit in early October.
In the first week of 2019, oil prices jumped, supported by rising equity markets, signs of a possible U.S.-China trade war thaw, and signs that OPEC and its largest producer Saudi Arabia are slashing oil production, possibly by more than they had pledged in early December.
Some analysts now believe that oil prices, WTI in particular, may be primed for a new rally, due to technical indicators and to the supply and demand picture going forward.
WTI Crude prices slumped to $42.50 this past Christmas Eve, but have rallied by 10 percent since then. The previous time when the U.S. benchmark hit that $42.50 low was in June 2017, after which prices rallied by 80 percent, Matt Maley, equity strategist at Miller Tabak, told CNBClast week.
According to Maley, a rally could form this time around too, if WTI breaks above $50 a barrel—the new resistance level around which prices bounced in November and much of December. Before the accelerated price slump in the last two months of 2018, $50 a barrel was the support level for WTI.
“If we can break above that and hold, that’ll show that we got a real nice double bottom, much like we got in 2016, and should give us a nice upside rally. It may not be 80 percent but it should be a good rally,” Maley told CNBC.
In the first days of 2019, oil prices had a good week, with Brent Crude rising by 9.3 percent and WTI Crude ending the week to January 4 up 5.8 percent. Brent Crude put up its best weekly performance in two years—since December 2016. Oil prices were supported by declines in production in OPEC and good U.S. economic data that sent the U.S. stock market rising.
Going forward, the key bullish factors for oil prices would be OPEC and allies’ cuts that began on January 1, slowing U.S. oil production growth because of the low oil prices in the past two months, and possible resolution of the U.S.-China trade war that has been threatening global economic growth and, as an extension, global oil demand growth.
According to Michael Bapis, managing directing director at Vios Advisors at Rockefeller Capital Management, oil prices are set for a rebound in the coming weeks and months, thanks to the OPEC/non-OPEC cuts and to lower-than-previously-expected U.S. oil production.
“We saw OPEC cut production by the most in two years, and it’s starting to work this month. The U.S. oil production is also much lower than people expected,” Bapis told CNBC.
OPEC’s oil production in December dropped by 460,000 bpd from November—the biggest monthly reduction since the initial cuts began in January 2017, according to the monthly Reuters survey. Saudi Arabia started to slash production earlier, output in Iran fell because of the U.S. sanctions, and Libya’s production dropped due to a shutdown and unrest at its biggest oil field Sharara, the survey showed.
This month, OPEC may cut production even more than anticipated, according to a former Saudi Aramco executive.
In the United States, growth in energy sector activity slowed significantly in the fourth quarter of 2018, the Dallas Fed Energy Survey for Q4 showed last week, suggesting that growth has stalled amid the sharp oil price decline at the end of last year. Yet, U.S. oil production continued to hold at a record 11.7 million bpd level for the last week of 2018, according to the EIA.
On the demand side, global oil and fuel hinges on factors other than the price of oil, and many of those factors are increasingly difficult to predict amid fears that an economic growth slowdown is coming.
Hopes that the U.S. and China could make some headway in trade talks beginning this week have supported equity markets and oil prices in the past few days. The trade war has weighed on economic growth forecasts, making oil demand growth for 2019 more difficult to predict.
The key factors in the next few months will be how much OPEC and friends’ cuts will help clear the oversupply, how much U.S. oil production growth could slow down with oil below $50, and how the global economic growth will hold.