Oil Market Roundup - Monday Week 2

Monday January 7, 2019

Once again, the Organization of the Petroleum Exporting Countries' (OPEC) newly-implemented output cuts were credited for crude prices rising yet again on Monday: Brent rose 27 cents to settle at $57.33 per barrel, while West Texas Intermediate rose 56 cents to settle at $48.52 per barrel.

With oil futures having gained over 7 percent since last Monday, Jim Ritterbusch, president of Ritterbusch and Associates, said in a note that, "We continue to view the OPEC production cuts that became official last week as a legitimate bullish consideration and we still look for the reduction to translate to a reduced U.S. crude surplus that could potentially be erased in some 8-9 weeks."

Supporting Ritterbusch's observations was news from Genscape that U.S. crude inventories at Cushing, Oklahoma fell by 565,000 barrels from last Tuesday to Friday.

However, given oil's spectacular price drop in the closing months of 2018, few analysts are able to work up much faith in the prospect of clear skies ahead, and in fact Goldman Sachs disclosed in a note that it had downgraded its average Brent crude oil forecast for 2019 to $62.50 per barrel from $70 due to "the strongest macro headwinds since 2015."

The bank stated, "We expect that the oil market will balance at a lower marginal cost in 2019 given: higher inventory levels to start the year, the persistent beat in 2018 shale production growth amidst little observed cost inflation, weaker than previously expected demand growth expectations (even at our above consensus forecasts) and increased low-cost production capacity."

Monday found Bloomberg in a similarly gloomy mood: the news agency noted that just as oil prices are recovering, "money managers' net-long bets on rising Brent crude prices fell for the first time in a month," plus "wagers on a Brent sell-off also jumped, leaving overall sentiment near its most bearish level since 2015."

Specifically, net-long positions in Brent (the difference between bets on a price increase and wagers on a drop) fell by 6.1 percent in the week ended January 1, according to data from ICE Futures Europe exchange.

Irene Haas, managing director at Imperial Capital Group, said, "People are extremely cautious; this sector has been very treacherous the last few years: just as you think things are going well, something goes wrong."

But as usual in the crude trading world, for every bearish prediction there is an optimistic reaction based on exactly the same data, and on Monday that was provided by Michael Lynch, president of Strategic Energy & Economic Research, who argued that "Between the OPEC cuts and weak Venezuelan production and Libyan problems, all of that is helping to put a floor on prices.

"We had such a sharp drop - that alone implies that we might have gotten oversold."

Taking the middle ground was Amrita Sen, chief oil analyst at Energy Aspects, who conceded that any recovery in prices is on shaky ground, but that futures still have room to run: she told CNBC, "I think as long as the global economy isn't collapsing, we should be able to climb a little bit higher, but it is going to be very fragile because the biggest, biggest uncertainty right now is the trade war going on between the U.S. and China."