Oil Market Roundup - Wednesday Week 1

Crude makes gains as OPEC+ cuts kick in. File Image / Pixabay

A modest Wall Street recovery helped a modest boost in crude prices on Monday, along with signs that Saudi Arabia exports for December fell by about 500,000 barrels per day (bpd) - which at one point caused crude to surge as much as 5 percent.

But in the end, the gains were blunted by the ongoing concerns that weakening global economic growth plus rising production from the U.S. and Russia will negatively impact demand: Brent gained $1.11, or 2.1 percent, to settle at $54.91 per barrel, after trading as high as $56.56; West Texas Intermediate settled up $1.13 at $46.54 per barrel, or 2.5 percent, after trading as high as $47.78.

The latest news to support traders fears of weakening demand was that China's factory activity contracted for the first time in more than two years in December - even though this was the result of the trade war with Washington, which will likely end in the foreseeable future.

Also, Euro zone manufacturing barely expanded at the end of 2018, according to a survey.

Jim Ritterbusch, president of Ritterbusch and Associates, said in a note, "We still view some slippage in the Chinese economy as a significant bearish consideration, given the fact that they had become the largest crude importer in the world."

The prospect of economic strife overshadowed news that the Saudi decline in oil exports for December - which stand at 7.2 million bpd - heralds the beginning of the Organization of the Petroleum Exporting Countries' (OPEC) agreement with 10 oil-producing nations, including Russia, to cut output by 1.2 million bpd.

It also overshadowed the disclosure on Monday from Michael Cohen, analyst at Barclays, that while U.S. production hit a record for a fifth straight month, growth slowed considerably from September due to pipeline bottlenecks in the Permian basin and other factors.

Even OPEC's launch of its output cuts was fodder for the bearish analytical sentiment: Scott Darling, head of Asia Pacific oil and gas for J.P. Morgan, told CNBC that "if OPEC didn't really cut by more than around 1.2 million barrels per day, and they did just for the first half, [not] for the full year, that we could gravitate toward ... our low-oil-price scenario, which is $55 Brent for 2019."

But he conceded that geopolitical risks in places such as Venezuela could also push oil prices up.

The wide-ranging prognostications of the analytical community aside, one thing seems certain in 2019 with regards to the crude market: although OPEC will be viewed in some quarters as the key players in achieving a proper supply and demand balance, its efforts will likely be compromised by soaring production from the U.S. and Russia, the latter of which raised output to 11.45 million bpd in December and has agreed to remove a mere 228,000 bpd under OPEC.

And, as if to signal the shape of things to come in 2019, Alexander Novak, energy minister for the former Soviet Union, recently stated that he sees no need to extend or deepen the OPEC cuts because its effects will become apparent as soon as this month or next.