The year 2018 was a yo-yo market for crude oil with prices showing wild swings. At the beginning of the year, the output cut strategy of OPEC under Saudi Arabia’s lead and Russia appeared to have delivered results for major producers.

Threat of sanctions on Iran and supply-related problems in Venezuela tightened the market fundamentals, pushing prices higher.

Large inflow of speculative funds exaggerated the price impact.

But as months wore on, the euphoria gradually evaporated. Taking advantage of rising prices, the US stepped up its shale oil output, becoming the world’s largest crude oil producer and a significant exporter. Also, the rigour of sanctions on Iran was whittled down to an extent.

Bearish sentiments

From a high of $86 a barrel early October, Brent has plunged by a massive $30 in about ten weeks.

Suddenly, the market finds itself in a state of surplus, especially with concerns over global economic growth prospects escalating. No wonder, speculative long position holders are exiting the market in droves.

Now, with Brent prices having slumped below the mid-50s level and WTI $10 cheaper (multi-month low), market participants are beginning to wonder if oil has overshot to the downside, Christmas holidays and US government shut-down notwithstanding.

The latest declines are driven more by bearish investor sentiment than fundamentals.

The agreed 1.2 million barrels a day production cut is expected to take effect from January 2019. Interestingly, the OPEC+ group has announced that production quota for each producer country will be set and published.

While the producer group is struggling to stop the market from sliding, to what extent and how long each constituent of the cartel abides by the agreed supply cut remains to be seen.=Meanwhile, the latest financial market upheaval has raised concerns over global growth in 2019. The world’s largest importer-guzzler of crude oil China is already slowing.

Demand to take a hit

Expectation that from the second half of the year the US, too, could begin to slow down is gaining ground. After all, the positive effects of stimulus package are fading. The rate hike cycle of the Federal Reserve may be paused and the dollar may reverse its strong run.

Given the scenario — world’s two largest economies slowing — crude oil demand is sure to take a hit, and this is surely a threat to oil prices.

Softer growth in demand may negate the positive effect of the recent supply cut decision, and may force the producers to examine larger cuts.

In other words, while the market may be more or less balanced in the first half of 2019, there are early signs that the second half may see inventories rising.

US, China factors

While crude oil market is likely to continue to remain under pressure in the months ahead, there are two risk factors that deserve attention. At the current prices, the anticipated expansion of US production may not materialise.

Even a couple of months ago, it was asserted that the US output would reach 1.4 million barrels per day in 2019.

At the same time, exports out of the US are likely to gather momentum as a result of which the present differential of $10 between WTI and Brent may narrow to $5.

China could turn out to be a known unknown. There is the possibility of the Asian major announcing a major stimulus package to reverse the slowdown.

In the event, the sentiment can undergo a change.

Otherwise, on current reckoning, crude is most likely to stay under pressure and hover around $60 a barrel in 2019.

The author is a policy commentator and commodities market specialist. Views are personal.

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