Have we seen a top for crude?

A widening demand and supply dynamic in crude looks set to put pressure on oil prices in 2019. With Brent and WTI already breaking key support levels, have we seen the top for now?

Source: Bloomberg

The oil market has been the subject of huge speculation of late, with a whole host of factors driving crude to a new near four-year high, only to see the price tumble into correction territory over the past month. The sector garners huge interest for traders given the influence of politics, economics, and game theory, centred upon some of the biggest nations in the world.

Why did the prices rise?

One of the biggest factors driving the prices up was the expectation that output would be hurt through instability in the likes of Venezuela, Iraq and Iran. Venezuela has the largest oil reserves in the world, yet with the country spiraling into crisis and a continued brain drain leading to a lack of expertise, crude output has been in sharp decline. Iran on the other hand is the third-largest oil producer in the Organisation of the Petroleum Exporting Countries (OPEC), and with the US sanctions coming into place this month, markets have been expecting to see a sharp deterioration in output from this point onwards.

Why are the prices falling?

While we have seen US President Donald Trump follow through with his pledge to restrict Iranian exports, there are significant doubts over whether this will truly dent global supply levels. Firstly, the US has been allowing concessions to certain countries, highlighting the fact that Trump sees high energy prices as being restrictive on growth. His desire for lower oil prices are likely to be a determining factor behind the somewhat looser implementation. It is worthwhile noting that the previous period of sanctions for Iran saw the country utilise the black market to get their product to customers. Thus, Iran is far from finished as a crude exporter. However, with Saudi Arabia previously promising to cover any lost output from Iran, there is a fear that despite ongoing Iranian crude production, we could see headline output fall and Saudi production rise in response.

Interestingly, this week has seen the Saudi government announce that they will reduce production by 500,000 barrels per day (bpd) in December to account for falling demand. Optimism from the market over the impact this would have has been muted at best. This table from today’s OPEC monthly report highlights the fact that OPEC output rose by 127,000 bpd in the past month alone, thus raising the chance that output cut will be swallowed up easily.

Table 5 - 9: OPEC crude oil production based on secondary sources, tb/d

2016 2017 1Q18 2Q18 3Q18 Aug 18 Sep 18 Oct 18 Oct/Sep


1090 1043 1014 1026 1059 1057 1057 1054 -4


1718 1634 1562 1493 1472 1462 1512 1533 22


216 252 306 324 317 317 318 324 5


545 530 515 519 528 530 528 525 -3

Equatorial Guinea

160 133 134 127 124 124 123 131 8


221 200 195 182 184 186 184 186 3

Iran, I.R.

3515 3813 3817 3818 3604 3609 3452 3296 -156


4392 4446 4441 4480 4629 4642 4654 4653 0


2853 2708 2704 2708 2798 2803 2797 2764 -33


390 817 991 889 892 955 1054 1114 60


1556 1658 1780 1653 1711 1723 1768 1751 -17


656 607 593 602 609 616 595 609 14

Saudi Arabia

10,406 9954 9949 10,114 10,422 10,404 10,502 10,630 127


2979 2915 2850 2873 2982 2969 3018 3160 142


2154 1911 1545 1383 1242 1240 1211 1171 -40
Total OPEC 32,851 32,623 32,394 32,190 32,573 32,637 32,773 32,900 127

Notes: Totals may not add up due to independent rounding.
Source: OPEC Secretariat

With markets largely disregarding the latest production cut from Saudi Arabia, there is a feeling that OPEC is going to have to take some very firm steps to lower output if they are going to arrest the decline in crude prices.

The wider story of supply outstripping demand is likely to be something that is going to dominate the year ahead. The IEA recently noted that while we will see positive demand growth in 2019, that is likely to be outstripped by the rate of ascent for output, producing a glut of crude which will show up in inventories data. The graph below highlights this shift, with the first-half of 2019 in particular exhibiting this gap between demand and supply.

Interestingly, this has been backed up by OPEC today, with the monthly report seeing a shift in demand growth forecasts. Their latest demand forecast of 1.29 million bpd is some way off the July figure of 1.45 million bpd.


Crude markets have recently shifted into contango, heightening the fears over future prices. While contango is the normal scenario for a market, it is a shift out of the backwardation phase which is typically associated with a bullish market. The phenomenon of contango comes about when the future prices are higher than the anticipated spot price at maturity of the futures contract. Brent crude has been in backwardation for pretty much the whole of 2018 thus far, boosting the bullish case that has been in place. However, with the market shifting from backwardation to contango, there is a feeling that this is providing support to the notion that we could be due to see further downside for crude prices.

The chart

From a charting perspective, we are also seeing signals of a potential breakdown for crude, with the break below $70.49 in Brent providing the first lower low since 2015.

The monthly timeframe highlights the wider trend of lower highs since the 2008 peak. That trend has the potential to continue, yet while we are unlikely to break below the 2016 lows of $27.43, we do look likely to move into a more bearish phase for now. Near-term targets, in the event that this continues, would be a retracement of the $44.53-$86.65 rally. Thus, keep an eye out for the $60.62 61.8% Fibonacci retracement as a support area of note.

Finally, the intraday picture highlights a clear downtrend, with the rally caused by yesterday’s Saudi production cut announcement sending the price into the 61.8% retracement at $71.90. That level now becomes an area of interest which must hold for the short-term downtrend to remain intact. Given the substantial downside seen over recent weeks, there is a strong possibility of a break higher at some point to take part of that move back. However, unless we see a break through the most recent swing high (currently $71.90), further downside seems likely from here.

OPEC meeting

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