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Oil To Trade Sideways In The Short Term

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2019 is young indeed but we’re already starting to see some signs of what will shape oil prices this year. On the downside, it’s clear that macro-economic concerns will continue to keep a lid on prices. On the upside, OPEC+ seems to mean business on their 1.2m bpd production cut offering, the key source of bullish risk in the market. These themes should sound familiar as bearish economic concerns and bullish tight supply concerns governed oil prices in 2018.

Away from oil, markets continue to signal that something is amiss with the 10-year old global economic recovery. Stock markets were hit hard this week after Apple lowered its 2019 revenue guidance based on slowing China sales- the company credited the Trump/Xi trade war in doing so- and S&Ps traded about 16% below their all-time high print just three short months ago. Equity market waves even created a mini ‘flash crash’ in several currency pairs. In China the carnage was even more severe with the Shanghai Composite lower by about 31% in the last twelve months following the release of China’s first contraction-territory PMI reading in 19 months. Even more interestingly, bond markets have begun to price in higher expectations of dovish central banking activity in 2019 allowing the yield curve to steepen slightly while rates have moved drastically lower. Not to be left out, commodities continue to show worsening deflation risks with the Bloomberg Commodity Index falling to its lowest mark in more than 2.5 years on Wednesday.

As for upside risk OPEC+ production cuts officially started this week. We got an early look into the urgency felt by the group on Wednesday when the cartel’s December production estimates began to roll in. Bloomberg analysis saw production falling 530k bpd m/m to 32.6m bpd for its largest m/m decline in two years. Saudi Arabia lead the effort to tighten supplies by reducing output by 420k bpd to 10.65m bpd. Libyan production dropped by 110k bpd due to political turmoil causing outages at its largest field and Iran’s output fell by 120k bpd as U.S. sanctions began in earnest. In the near term it seems highly possible that reduced output from Saudi Arabia, Libya and Iran will help prevent further decimation of oil prices. Spread markets suggest as much as the prompt 1-month brent spread has treaded water with a modest contango of 25 cents which may find support as supply cuts- and the impact of Iranian sanctions- continue to…




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