Why 2019 Could Start With An Oil Rally

January 2, 2019: Why 2019 Could Start With An Oil Rally

Oil prices have regained significant ground since the Christmas Eve meltdown, and there is potential for higher prices in the weeks ahead.

Trying to guess what will happen next with oil is foolish, but several trends and upcoming events could pave the way for a tightening up of the oil market. As we close out the year, December could potentially go down as the low point in the latest price cycle.

To start with, the OPEC+ cuts take effect at the start of January, and in reality, even if the group does not reach the promised 1.2 million barrels per day (mb/d) right away this week (it surely won’t), the reductions have been likely underway for some weeks. By some counts, OPEC production fell more than 800,000 bpd in December, most of which came from Saudi Arabia.

So, we start the New Year with big reductions in supply. The cuts will not balance the market right away, and there is disagreement from analysts over whether or not the size of the reductions is ultimately sufficient. At a minimum, the group may need to extend the cuts through the end of 2019 instead of letting them expire in June. But top OPEC officials have already signaled that they are willing to do that.

The second reason that the oil market may have bottomed out is that the waivers on Iran sanctions are set to expire in May. The latest data from Reuters shows that the volume of imports by Asian countries of Iranian crude hit a low in December at 664,800 bpd, down 12.7 percent from a year earlier. However, countries such as South Korea and Japan have indicated that, with waivers from the U.S. Treasury in hand, they could buy more oil from Iran beginning in January.

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