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A volatile 2019 is very much on the cards as far as crude markets are concerned. Oversupply and demand worries are weighing high on the industry, making volatility a buzzword for the year.

Despite encouraging talk on trade from President Donald Trump, the coming months still look unsettled, Phil Streible, senior market strategist at RJO Futures in Chicago, was quoted in the press as saying. And he had a point.

“We’ll probably start off 2019 on the same foot, weighed down by record US production as well as the lingering trade war,” Streible said in a press interview. “We won’t see a rebalancing of the market until past the first quarter, so I would expect us to get trading right around these lows.”

A sense of urgency is creeping up within the Organisation of the Petroleum Exporting Countries (Opec) and its allies, commonly being termed as Opec Plus, spurring the group into action – earlier than planned.

This was evident from the fact that even before the cuts kicked in, the output from Opec fell by the most in almost two years in December, according to a Bloomberg survey of officials, analysts and ship-tracking data.

Half a million barrels per day (bpd) output reduction was reported even before the cut was designed to be operational.

As per Bloomberg, crude exports from the Opec kingpin, Saudi Arabia declined to 7.253mbpd in December, from 7.717m in November.

The kingdom’s cutbacks reduced Opec’s overall output by 530,000bpd last month, and this was the group’s sharpest pullback since January 2017. The United Arab Emirates too showed a decline in output.

Data from S&P Global Platts’ cFlow software also pointed out a similar cut in Saudi crude output.

As per the data, Saudi’s oil exports fell to 7.523mbpd in December, down from 8.162mbpd in November.

Yet, despite all these efforts, markets are not settled. Headwinds continue to dampen the crude scenario. Despite the output cuts, Russian production reportedly hit a post-Soviet record in 2018, while the US output too reached a record in October and is projected to continue to rise.

Already American drillers are pumping at record levels. More than 100 additional oil rigs were deployed across the US last year, with overall crude production topping 11mbpd.

Late 2018, oil stockpiles at the US storage hub in Cushing also surged to the highest level since January, while nationwide inventories were reported near a one-year high, according to Energy Information Administration data.

Inventories in Organisation for Economic Cooperation and Development’s (OECD) industrialised economies also continued to build in October for the fourth consecutive month, by 5.7mbarrels, to an ocean of almost 2.9 billion barrels, according to the International Energy Agency.

While, these factors were enough to dampen the market sentiments, yet, other issues are impinging too. Opec member, Iraq’s oil exports jumped in December compared to November, as exports from the southern ports at Basra hit a record high and exports from the northern Kirkuk fields also went up after a slow tentative resumption in November following a year-long hiatus.

In December 2018, Iraq’s oil exports averaged 3.726mbpd, compared to 3.372mbpd of exports in November.

Fresh signs of contraction in China’s economy is also clouding the crude prospects in 2019.

As per a report last week, the China Caixin manufacturing purchasing managers’ index fell to 49.7 in December, marking the first time the sector has been in contraction territory - below 50 - since May 2017.

Markets are rightly worried that a slowdown in the world’s second largest economy, and the biggest oil importer, can translate into a slack in appetite for oil.

With the overall scenario gloomy, it is becoming harder to predict global crude demand during the year. The world consumed on average a record 100mbpd of crude in 2018 but the positive outlook is being clouded by weaker economic growth.

Opec Plus is aware of it. In view of the gathering clouds, talk is rife of a possible ‘extraordinary’, unscheduled meeting of its oil ministers before April.

Indeed, if the cuts are expanded, Opec’s desired price range of $60-70 per barrel might well be achieved, but that would encourage higher production in the US shale belt, and indeed elsewhere, Canada included.

And this could translate into a loss of market share for some in Opec.

Gaurav Sharma writing for Forbes rightly says that apart from issues with its own credibility, the potent problem Opec is grappling with is that it is damned if it cuts output, and damned if it doesn’t, with either move bringing a different kind of crude pain; and all of it for the sake of trying to keep oil prices within a very modest $60-70 range.

Time, for sure, has changed.

Published in Dawn, January 6th, 2019

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