Crude oil is under pressure Thursday as reports of OPEC infighting cast doubts about the cartel’s ability to rein in production in 2019. Saudi Arabia, the group’s de facto leader, is also under attack following an IEA reporting showing record output from the kingdom in November.

Rally Sputters

The rally in crude prices appears to be choppy and short-lived since last week’s high-profile production meeting in Vienna, Austria. On Thursday, U.S. West Texas Intermediate (WTI) futures were down 34 cents or 0.7%, to trade at $50.81 a barrel on the New York Mercantile Exchange. The January futures contract reached a session low of $50.35 a barrel.

Brent crude, the international futures benchmark, bottomed at $59.33 a barrel on London’s ICE futures exchange. At the time of writing, it was down 35 cents, or 0.6%, to $59.80 a barrel.

Record Production

The International Energy Agency (IEA) reported Thursday that crude production among OPEC members reached record highs in November, casting doubts about the planned output cuts by Saudi Arabia and its allies. The 15-member cartel churned out 33.03 million barrels per day in November, a net gain of 100,000 barrels per day over the previous month.

Gains were driven entirely by two members: Saudi Arabia and the United Arab Emirates. Saudi’s daily production jumped 410,000 barrels to 11.06 million barrels, a new record high. The UAE saw its output climb by 110,000 barrels per day to reach 3.33 million barrels per day. In doing so, the UAE surpassed Iran as the group’s third-largest producer.

IEA data contrasts sharply with the official OPEC report, which showed a slight decrease for the month of November. More importantly, it raised suspicion that the Saudis are not intent on lowering production by any significant amount in the new year but are simply paring back from record levels.

Political Headwinds

The Saudis are facing pressure from within the producer group and from the United States on issues ranging from production policy, the war on Yemen and the killing of Jamal Khashoggi. Bloomberg reports that Iran’s oil minister Bijan Zanganeh has vocalized serious political disagreements within the cartel that came to light during last week’s production meeting in Vienna. What’s more, Qatar is planning to quit the producer group in the new year to focus on natural gas production. This may exacerbate the geopolitical rift between Doha and a Saudi-led coalition of Arab states that have blockaded the tiny Gulf country.

In a rare show of bipartisan support, the U.S. Senate last month voted to end support for Saudi Arabia’s devastating war on Yemen. The vote came as the CIA offered irrefutable evidence that Saudi Crown Prince Mohammed bin Salman (MbS) was party to the killing and dismemberment of U.S.-based journalist Jamal Khashoggi.

You have to be willfully blind not to come to the conclusion that this was orchestrated and organized by people under the command of MbS,” Republican Senator Lindsey Graham said earlier this month.

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Crude oil bounced back sharply on Tuesday after Saudi Arabia provided hard numbers on its planned output cuts in January, raising optimism that OPEC and its allies were pushing ahead with their plan to drain the market of excess supply.

Crude Bounces Back

The West Texas Intermediate (WTI) benchmark for U.S. crude futures climbed $1.24, or 2.4%, to $52.24 a barrel on the New York Mercantile Exchange. The London-traded Brent contract for February settlement gained 90 cents, or 1.5%, to $60.87 a barrel. Both contracts are down more than 30% from their October peak.

The two-month selloff followed a half-year stretch of considerable gain for oil, with several analysts forecasting a return to $100 a barrel in the not-too-distant future. A combination of global growth woes, efficient U.S. shale production and rising inventories has delivered a major blow to that outlook.

Saudi Announces Production Cuts

Oil prices have bounced around since late last week, as traders continued to evaluate market fundamentals. On Thursday, the Organization of the Petroleum Exporting Countries (OPEC) announced it had agreed to reduce crude output in the new year. Twenty-four hours later, the cartel and its principal ally, Russia, agreed to curb production by 1.2 million barrels per day.

The Saudis have backed up that commitment by announcing Tuesday that crude supplies will fall to 10.2 million barrels per day in January compared with 11.1 million in November. At the same time, Libyan production fields remain offline after armed protesters forced a shutdown of the Sharara oil field. That will cost the war-torn nation in excess of 300,000 barrels per day, according to the state-owned National Oil Corp.

The production shortfall in Libya, combined with the export restrictions placed on Iran, should help OPEC and its allies drain the excess supply glut. However, the cartel is unlikely to succeed in the long run as higher prices encourage U.S. producers to ramp up production. In a recent forecast, analysts at Citi said they expect international crude prices to remain stuck at $60 a barrel for the balance of 2019. That’s not far off current levels.

In terms of data, the American Petroleum Institute (API) will report on U.S. inventories later in the day. The official crude inventory report courtesy of the U.S. Energy Information Administration (EIA) will be released Wednesday morning.

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Crude oil was back on the defensive Monday, as the OPEC-induced rally showed signs of fizzling amid apparent geopolitical and economic headwinds. In short: traders are still doubting whether the planned output cut announced on Friday will be enough to drain the supply glut in the face of waning economic growth and lower demand projections.

Rally Falls Short

The U.S. and international benchmarks declined at the beginning of the week, partially offsetting Friday’s short rally. The U.S. West Texas Intermediate (WTI) benchmark swung from an intraday high of $52.81 a barrel all the way back down below $52. At the time of writing, WTI for January settlement was worth $51.91 a barrel, down 70 cents, or 1.3%. Brent crude for February delivery slipped 55 cents, or 0.9%, to $61.12 a barrel.

Natural gas prices were also down on Monday. The benchmark Nymex futures contract dipped 3 cents, or 0.6%, to $4.46 MMBtu.

A stronger U.S. dollar was a primary source of headwinds for commodity prices on Monday. The dollar index (DXY), which values the greenback against a basket of six currencies, rose 0.3% to 96.76.

OPEC+ Deal

On Friday, the Organization of the Petroleum Exporting Countries (OPEC) announced it had reached a deal with Russia to reduce global crude output by a combined 1.2 million barrels per day. The output cut was higher than expected and signaled a renewed readiness to re-balance the market following a two-month collapse in prices. Crude officially entered bear-market territory last month, having lost roughly one-third of its value since the October high.

According to analysts, the decision by OPEC, Russia and their allies should stem the price collapse for the time being and support a recovery towards $70 a barrel. However, it’s not entirely clear whether the strategy is sustainable given the resurgence of U.S. shale and America’s push for energy independence under President Trump.

The U.S. leader has blasted OPEC for its production policies and has called on the cartel not to support any initiative that would raise prices drastically. The Trump administration is relying on competitive crude prices to feed the nation’s economic recovery, which is showing signs of slowing.

At the same time, there are considerable doubts about how the OPEC+ coalition will implement its production cuts. Analysts at Goldman Sachs Group Inc. and Morgan Stanley have expressed concern about whether producers can stay on the same page given how difficult compliance has been in the past.

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Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.6 stars on average, based on 701 rated postsSam Bourgi is Chief Editor to Hacked.com, where he leads content development for one of the world's foremost cryptocurrency resources. Over the past eight years Sam has authored more than 10,000 articles and over 40 whitepapers in the fields of labor market economics, emerging technologies, cryptocurrency and traditional finance. Sam's work has been featured in and cited by some of the world's leading newscasts, including Barron's, CBOE and Forbes. Contact: sam@hacked.com Twitter: @hsbourgi

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