Crude Oil Braces for First Yearly Drop Since 2015

Oil’s bear-market relapse has put the black commodity on track for its first annual drop since 2015. And while many expect a rebound in 2019, the outlook remains tilted to the downside thanks to actual and perceived imbalances in the market.

Volatile Fourth Quarter

Oil futures drifted between gains and losses at the start of the week, as markets consolidated following a series of volatile swings. The West Texas Intermediate (WTI) benchmark for U.S. crude futures reached a session high of $46.43 a barrel on the New York Mercantile Exchange before falling to a low of $44.73. It now sits at $45.34 a barrel, where it was virtually unchanged from the previous close.

Brent crude, the international futures benchmark, followed a similar trajectory. Prices peaked at $54.82 a barrel through the early morning session before falling to a low of $52.66 a barrel. Brent last traded at $53.44 a barrel, up 23 cents, or 0.4%.

WTI is on track for a yearly loss of 25%, while Brent has shaved 20% off its value since Jan. 1. Both contracts re-entered bear-market territory in the fourth quarter after falling more than 20% from their peak. The peak-to-trough would eventually widen to 40%, which signified the market’s worst downtrend since the price collapse of 2014.

The WTI contract peaked at $76.41 a barrel on Oct. 3, the highest in four years. On Christmas Eve, prices crashed to a new 17-month low of $42.53 a barrel.

Oil to Face Difficult 2019

It wasn’t so long ago that analysts were talking about the possibility of $100 a barrel oil by Q1 2019. Now, triple-digit prices seem virtually impossible as the market contends with oversupply constraints, weakening demand growth in emerging markets and the risk of an ongoing U.S.-China trade dispute.

The United States’ emergence as an oil superpower has also damaged OPEC’s ability to manipulate the market to its liking. According to the Energy Information Administration (EIA), the U.S. is now the world’s largest producer of crude. Increased efficiency also means U.S. producers can pump more during prolonged market downturns, a luxury OPEC does not enjoy.

According to a recent poll of economists and analysts conducted by Reuters, Brent futures will likely average around $69 a barrel in 2019. That’s more than $5 lower than the November estimate. The first half of the year will be dominated by speculation about whether OPEC+ can succeed in rebalancing the market following its decision to curb production by 1.2 million barrels per day. At this stage, traders are all but convinced that the cartel and its allies will introduce bigger cuts in the future.

OPEC’s April meeting will provide an important glimpse of the cartel’s thought process and whether member states believe that the existing strategy is bearing fruit. This is the most likely date that traders can expect another round of output cuts to be announced.

Featured image courtesy of Shutterstock.

Chief Editor to and Contributor to, Sam Bourgi has spent the past nine years focused on economics, markets and cryptocurrencies. His work has been featured in and cited by some of the world's leading newscasts, including Barron's, CBOE and Forbes. Avid crypto watchers and those with a libertarian persuasion can follow him on twitter at @hsbourgi