After falling from $76.90 to $42.36 - a collapse of 45% - during the third quarter of 2018, the price of West Texas Intermediate crude reversed momentum into the New Year. The recovery that followed the market sell-off helped to push prices back to the $50 area, up more than 20% from the low from December 24th. The decision of OPEC and its allies to trim production by 1.2 million barrels per day for the first six months of 2019 has been determinant - the cartel will reduce production by 800k barrel, while Russia and allies will cut by 400k barrels. However, we remain sceptical that every member of the deal would actually deliver what is expected. Indeed, it would not be the first time that such a situation would take place, especially since this is a clear opportunity for US frackers to maintain production and sell at a higher price. Initially, it was a supply story. Indeed, US inventories have increased substantially between September and November last year, which is in our opinion is the main reason, together with the increase in OPEC’s output, behind the sell-off. However, both US inventories and OPEC’s production started to contract again starting early December, which helped to boost prices. Even though, this is only half of the story, the glut issue seems to be under control for now. On the other side, the global growth outlook and more specifically the slowdown of the Chinese economy have led to major concerns over crude demand. China is now the largest importer of crude following by the US, with $162bn and $139bn worth of crude oil imported in 2017, respectively. Therefore, depending on growth developments worldwide, and especially in China, OPEC’s decision to slash production might not be enough to lift prices on the medium to longterm. Last week, crude oil prices edged slightly higher, with the WTI trading with a positive momentum as it climbed from $50.30 to $52.90. However, it has been unable to break the $53-53.30 resistance area to the upside. On the downside, the low from Monday 14th is the nearest support.
By Arnaud Masset