Get 40% Off
🤯 This Tech Portfolio is up 29% YTD! Join Now to Get April’s Top PicksGet The Picks – Just 99 USD

Oil Hits New 2018 Low After Tuesday's Tumble: 3 Reasons Why

Published 12/20/2018, 05:30 AM
Updated 07/09/2023, 06:31 AM

Oil prices tumbled nearly 8 percent on Tuesday, hitting new lows for 2018, with WTI down 40% from highs near $80 per barrel in October.

WTI Daily Chart

The drop reflects several ongoing issues in oil markets that include the following:

1. Data indicating significant growth in US oil production

Recent EIA data revealed that oil production in the United States grew even more than previously believed in recent months. In fact, during the last week of November, the US was actually a net exporter of crude oil and petroleum products. The most recent Monthly Statistical Report from API showed that US crude oil production averaged 11.6 million barrels per day in November, making the US the world’s largest oil producer. API’s data for the second week in December also showed a large build in crude oil stores in the US, which in part precipitated oil’s drop. In contrast, the EIA’s weekly report showed a small draw (less than 500,000 bpd) in oil stocks from the US, which probably won’t do much to push oil prices out of their current trough.

The presumption is that despite WTI prices hovering in the $40s and low $50s, oil production from US shale oil regions is an unstoppable juggernaut that will continue unabated into 2019. The truth is that low oil prices aren’t good for US producers, but can be managed if companies hedged smartly back in September; their planned infrastructure improvements come online and companies continue to have access to investment and lines of credit.

Many are focusing on the number of DUCs (oil wells that are drilled but uncompleted) that could quickly be brought online with minimal expense. These DUCs do represent untapped production potential, but it is difficult to accurately quantify how many can and will actually be brought into production in 2019. Although the forecasted production growth for US shale is very robust for 2019, it is important to remember that it requires a confluence of conditions that may not all play out as expected, especially if WTI remains below $55 per barrel for several months.

2. OPEC and Russia’s lackluster production cut

Russia and OPEC did deliver a significant production cut in early December (1.2 million bpd), but this number wasn’t enough to satisfy the market—with good reason. This cut will begin in January and reflects a decrease from OPEC and Russia’s October production numbers. In other words, Saudi Arabia will be shrinking production by about 400,000 bpd and Russia by about 228,000 bpd.

Putting this in context explains why the market has continued to drop despite these plans. EIA data show the United States increased its own oil production by 1 million bpd between June and November, more than obliterating Saudi Arabia and Russia’s planned cut.

3. Demand

All forecasts for 2019 show global demand growth for crude oil slowing. The exact forecasts have been amended multiple times.

The deceleration in demand growth will probably hinge on the degree to which a global economic slowdown materializes in 2019. In the United States, economic activity remains strong despite the falling stock market, and jet fuel demand (a good indicator of economic growth) is still strong and growing.

However, the focus in 2019 will be on emerging economies and whether they experience slower growth. Of course, oil prices in the $40s and $50s could help spur additional economic growth, particularly in those regions.

Note on Saudi Arabia’s 2019 budget and oil policy: Saudi Arabia released its 2019 budget earlier this week. It includes a 7 percent increase in spending. At $295 billion in total, it's the largest budget the Kingdom has ever posted.

According to financial firm Al Rajhi Capital, the fiscal breakeven for this budget would require Saudi Arabia to sell its oil at $84 per barrel. Bloomberg calculates $95 per barrel. Given where oil prices are today, many analysts are already assuming that, in 2019, Saudi Arabia will take action to push up oil prices in order to balance its budget.

Traders would be ill-advised to take these analyses seriously. Saudi Arabia’s expected deficit is only about 4.6 percent of GDP. It is entirely reasonable for a country like Saudi Arabia to run a deficit rather than tighten spending or force an increase in revenue at this point.

Saudi Arabia still maintains large foreign currency reserves that it can tap into if necessary and it is still able to borrow money. It would be a mistake to assume that Saudi Arabia will aggressively push for higher oil prices in the immediate term based on this budget. The Middle Eastern country is in no rush to balance its budget, as it has at least 70 years of oil in the ground and can pay more attention to debts in future years.

Latest comments

A nice article but no mention of the waivers for the Iranian Sanctions.  The anticipated removal of Iran's oil production from the equation helped cause the increase in price.  Once Trump granted waivers to many of Iran's customers it nullified the expected decrease in global inventory.
I covered this in last weeks column: https://m.investing.com/analysis/3-key-issues-that-will-move-oil-prices-in-early-2019-200367620
Hteat article! Thank you!
Thank You Ellen for another well written article. Do not fret about the bone head comments, stats are stats and you have run with something and the EIA something with its faults it still offers some comparisons. Typical commenters gold bugs, nay sayers and gloom and doom conspiracy theorists.
You would think that someone with a Ph D would at least question why the EIA is now reporting production in 100,000 b/d increments.  The data is meaningless.
Economic reset. Fed implosion. End of the Fed. Gold standard coming. Yes,we have large amounts of gold!
It's down because the market wants it to be. Commodities are pretty well manipulated. It's sort of like the price started crashing and then people needed to peg a reason why.
not to mention the epic record number of long positions unwinding with record speed.
Hog wash, US shale is in a tailspin.  Texas shale production declined 6 million barrels for the month from Aug. to Sept.    Diesel fuel is 11% under the 5 year average and can't keep up with demand.  Your article is nothing more than a paid advertisement in the form of fake news sponsored by a hedge fund or anonymous group.
you don't trust EIA data? Have you visited all the links in the article?
 Touchy!!!
5ynthetic, get ready for $150+ crude into 2020.
shale oil can still grow at oil sub $ 50 ELLEN ?
Thanks. Nice one
Fantastically balanced perspectives, Ellen!
Thanks ellen
Thanks Ellen, good information here.
Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.