A tumultuous first trading week of 2019 headed towards a calmer close. After hitting a 33-months low the Bloomberg Commodity Index managed to climb to record its first weekly gain in five. The global market rout was caused by economic and political uncertainty as well as tightening liquidity paused on Friday after Beijing confirmed that a US trade delegation would visit on January 7- 8, says Ole Hansen, Commodities Strategy Director, Saxo Bank.
Crude oil is beginning to show signs of support following the +40% collapse since last October. Since hitting the key technical and psychological $50/b level last week it has managed to recover strongly due to an improved outlook for both supply and potentially also demand.
On the supply side, the Dallas Fed in its Q4 Energy Survey said that the region’s oil and gas sector growth had stalled amid the sharp oil price decline. The (anonymous) comments from top oil and gas executives provide a good insight into the renewed stress caused by the dramatic price slump. US shale oil production growth is likely to slow following the price slump, but if the 2014 to 2016 sell-off is anything to go by it may take up to six months before the impact becomes visible in the data which for now continue to show year-on-year growth close to 2 million barrels/day.
While doubts are being raised by US production growth going forward, Opec responded strongly to the worsening outlook by slashing December crude oil production by the most since January 2017. Monthly production surveys from Bloomberg and Reuters both showed that Opec had cut production by around 500,000 barrels to 32.6 million barrels/day. The slump was led by a voluntary reduction from Saudi Arabia (420,000 b/d) and unplanned reductions from Iran (120,000 b/d) and Libya (110,000 b/d).
While supply reductions may begin to provide some support, the demand outlook needs to stabilise as well. The previous sell-off occurred during a time of rising demand; on that basis producers found it relatively easy to trim output and change the direction of oil. This time is different with Opec and other producers not only having to deal with a renewed pickup in US production which may take months before slowing.
They also must worry about the global outlook for growth and demand, something over which they have no control. The fact that China (the world’s biggest importer of oil) and the US (the biggest consumer) are fighting a trade war is a matter of concern. This concern, however, has yet to be reflected in the official forecasts from Opec, the EIA, and the IEA. During the past six months they have only reduced global demand growth by an average of 100,000 barrels/day to 1.4 million.
Having found support at $50/b, Brent crude oil is now challenging resistance at $57.50/b, the November low. A break higher could see a return to the previous consolidation area around $60/b.
Natural gas has returned to $3/therm following the mid-November cold blast surge to almost $5/therm. The weakness has been driven by a return to unseasonal mild temperatures across the U.S. lower 48 states leading to smaller-than-average stockpile draws. These developments have by now removed the fear of an end of (winter) season supply crunch.