Crude oil mounted a stunning decline in the closing months of 2018 as global growth concerns weighed on demand prospects and supply was bolstered by the shale boom in the United States. At the start of October, West Texas Intermediate (WTI) crude traded at levels near four-year highs. In the weeks following, the commodity plummeted nearly 40 percent. Despite an incredibly painful quarter for crude, the outlook remains bleak.

CRUDE PRODUCTION REMAINS ROBUST

The US shale boom in the Permian Basin has seen global supply surge. Further, the United States is now the world’s top crude producer and a net-exporter of oil for the first time since 1973 according to federal data. Massive production flows have resulted in ample inventory and a consistent downward pressure on the price of the West Texas blend.

While shale production shows no sign of slowing down at the quarter’s start, profitability concerns loom for many producers if crude prices continue to tread lower. Historically the cost of production per barrel of US shale lies between $30 and $50. Should prices slip much farther inside the range, production may dwindle as smaller shale companies struggle to cope with thinner margins or unprofitability. Such a development may in theory create a lower limit for crude prices as producers consider production cuts to stay afloat. Either way, the floor for WTI is uncertain but the US blend should enjoy significant support as it approaches the average cost of shale production.

DEMAND CONCERNS LOOK TO PERSIST

While supply can shift more readily, crude demand is tied more closely to global growth and growth outlooks which often have longer time horizons than OPEC meetings. Policy bigwigs including International Monetary Fund (IMF) Managing Director Christine Lagarde have voiced warnings of a global slowdown and the concerns have been echoed across many major economies.

According to the IMF, the four largest oil consuming nations are all forecasted to face a slowdown in growth. Thus, the case for steady or increased demand is weak while the case for oversupply remains firm.

The caveat to this trend is profitability in the US shale region and stability within the various OPEC+ nations. While shale production looks to remain profitable in the near term, stability within OPEC appears as the headline uncertainty. Many members like Iraq, Iran and Libya are mired in geopolitical tension and could face significant output cuts at any time on short notice. Such developments would likely boost crude prices as supply slides. Given the current relationship between supply and demand coupled with a relatively stable fundamental foundation, traders will likely see crude oil trade lower or sideways in the coming quarter.