Crude Falls 25% in 2018

Monday December 31, 2018

The last trading day of 2018 may have seen modest crude gains, but as revelers on Monday celebrated the incoming year, analysts noted that U.S. oil and Brent lost almost 25 percent and 20 percent respectively over the past 365 days: the first annual loss since 2015.

Moreover, while Wall Street anticipates a recovery for oil prices in 2019, the forecast comes with considerable risk.

West Texas Intermediate ended Monday's session up 8 cents to $45.41 per barrel, while Brent climbed by 65 cents to $53.86 per barrel, the result of 2 percent gains earlier in the day (due to U.S. president Donald Trump signaling progress on a trade deal with China) being offset by data showing sluggish Chinese manufacturing activity in December.

Tom DiChristopher, a reporter for CNBC, noted that in a year when experts predicted oil would surpass $100 (due to fears that the U.S. sanctions against Iran would cause a worldwide oil shortage), it's easy to understand why prices dropped so suddenly and quickly: the sanction fears prompted the Organization of the Petroleum Exporting Countries (OPEC) to turn on the taps, but then came the stock market plunge, the notion that demand for crude would grow more slowly than originally thought, and American crude output growing more quickly than expected.

DiChristopher wrote, "Investors began dumping risk assets, and by the end of [October], oil had plunged about $11 a barrel from its October 3 high."

However, the CNBC pundit also quoted Neal Dingmann, oil equity analyst at Suntrust Robinson Humphrey, as saying that the low crude prices are starting to cause some U.S. producers to back off, which could lead to a gradual reduction in American production in the first or second quarter - and help OPEC to balance the market.

That sentiment was echoed by John Saucer, vice president of research and analysis at Mobius Risk Group, who remarked, "You could have a meaningful rally; more companies are reducing capital expenditures, and production probably isn't going to go as high as forecast."

Still, analysts overall have a bearish outlook for 2019: according to Wall Street forecasters, Brent will average about $68-$73 per barrel, and WTI will mostly fall in a range between $59-$66 per barrel - however, according to CNBC their end-of-year research notes "are filled with warnings that oil prices could spike or slump outside of that range; the risks range from closely watched macroeconomic factors like the U.S.-China trade dispute to underappreciated threats emanating from refineries in Asia."

Plus, as Ed Morse, global head of commodities at Citi, pointed out, OPEC's soon to kick in cutback efforts could encourage U.S. drillers to put more crude on the market and "almost certainly" set up another sell-off.

In short, the prognostications for crude on Monday were nothing new, and although countless experts have tried to rationalize market performance in the closing months of 2018, Scott Bauer, chief executive officer at Prosper Trading Academy, recently argued that there's no real rhyme or reason for trading behaviour, and that "the market is extremely, extremely confused."