Oil is getting a boost on trade deal hopes as well as a week of optimism that global central banks are ready to be more accommodative to support economic growth. For oil that is very supportive because despite of all the talk of a reaction, oil demand has not seen any significant decline. That, of course, means that OPEC is already complying with production cuts ahead of schedule even if we see the Russians are moving slowly like Russia always does. The IEA, while they see a long slog to market balance, their own data that they released doesn’t seem to support their thesis. And while we still have some resistance above before oil really breaks out, the trading in this range suggest that the longer we consolidate the bigger the ultimate upside price move.

Oil was bouncing off support stuck in a range but turned decidedly higher on a Wall Street Journal report that “ U.S. officials are debating ratcheting back tariffs on Chinese imports to calm markets and give Beijing an incentive to make deeper concessions in a trade battle that has rattled global economies. The idea of lifting some or all tariffs was proposed by Treasury Secretary Steven Mnuchin in a series of strategy meetings, according to people close to internal deliberations. They say the aim is to advance trade talks and win China’s support for longer-term reforms. But Mr. Mnuchin faces resistance from U.S. Trade Representative Robert Lighthizer, who is concerned that any concession could be a sign of weakness, these people said.”

Yet denials from the White House about the story caused a pause in the market enthusiasm, yet the market is tending to believe it because it would make too much sense. President Trump wants a deal and the Chinese have already made some concessions buying U.S. grains and oil for example and the desire to get this done soon would be in everybody’s interest.

It is Saudi Arabia’s interest to get oil back to $80 a barrel. Reports confirm what we have been hearing that Saudi Arabia cut production by more than expected, by 468,000 bpd to 10.5 million bpd, according to independent country data. The International Energy Agency (IEA) says that while Saudi Arabia is determined to protect its price aspirations by delivering substantial production cuts, there is less clarity with regard to its Russian partner. Data shows that Russia increased crude oil production in December to a new record near 11.5 mb/d and it is unclear when it will cut and by how much. Other non-OPEC countries joining in the output deal saw higher output, including Mexico. U.S. oil production growth combined with a slowing global economy will put oil prices under downward pressure in 2019, challenging OPEC’s resolve to support the market with output cuts.

Yet at the same time, the IEA had to admit that its estimate for oil demand growth for this year is unchanged at 1.4 million barrels per day, close to 2018 levels. The reason they say is because “The impact of higher oil prices in 2018 is fading, which will help offset lower economic growth.” Yet this agency is famous for underestimating and if that growth exceeds this number, global supply based off of their own data would suggest a risk of a major tightening of global oil supply.

Yet the IEA says there are signs that market re-balancing will be gradual. They say the trajectory of Iran’s production and exports remains important. In December, total exports increased slightly to over 1.3 mb/d. With U.S. waivers allowing Iran’s major customers to buy higher volumes than was previously thought, more oil will remain in the market in the early part of 2019. (Thanks President Trump)

Venezuela has seen the collapse of its oil industry slow during the second half of 2018 with production falling recently by about 10 kb/d each month rather than by the 40 kb/d we saw earlier in the year. The level of output in the world’s biggest liquids producer, the United States, will once again be a major factor in 2019.

We saw incredible and unexpected growth in total liquids production of 2.1 mb/d in 2018. For this year, we have left unchanged for now our forecast for growth of 1.3 mb/d. While the other two giants voluntarily cut output, the U.S., already the biggest liquids supplier, will reinforce its leadership as the world’s number one crude producer. By the middle of the year, U.S. crude output will probably be more than the capacity of either Saudi Arabia or Russia. 

For oil demand, there is a mixed picture. Falling prices in 4Q18 helped consumers and there are signs that trade tensions might be easing. In many developing countries, lower international oil prices coincide with a weaker dollar as the likelihood of higher U.S. interest rates fades for now. However, the mood music in the global economy is not very cheerful. Confidence is weakening in several major economies.

In the meantime, refiners face a challenging year. Processing capacity will increase by 2.6 mb/d, the biggest growth for four decades, while margins are already pressured by low gasoline cracks due to oversupply and weak demand. The well-trailed changes to the International Maritime Organization’s marine fuel regulations due in 2020 are another big issue for some refiners as they seek to find outlets for unwanted high Sulphur fuel oil. By the end of the year, all industry players, upstream and downstream, may feel as if they have run a marathon.