OPEC production cut fails to spark crude revival

Despite immediate gains, the 1.2 million barrels per day production cut agreed by OPEC+ has failed to really gain traction. Following a surprise sharp drawdown in US inventories, markets await a signal on whether we will see a bullish reversal start to take shape.

Oil pipes
Source: Bloomberg

Crude oil has been in the spotlight of late, with expectations of a production cut from OPEC+ (which is the Organisation of the Petroleum Exporting Countries [OPEC] plus the inclusion of non-members such as Russia, Mexico and Kazakhstan, among others) bringing the possibility of a bottom for a market that has spent much of the past two months in decline. However, while we did see a production cut, the outcome has been somewhat muted, raising questions over whether this will really be enough to reverse the fortunes of crude.

While we have been seeing big declines of late, last week saw volatility in both directions. This came despite an unexpected drawdown in crude inventories. Recent predictions for 2019 from both the Energy Information Administration (EIA) and OPEC have alluded to a potential oversupply in crude, raising expectations of a drastic rise in inventories. The EIA chart below highlights as much, with the first half (H1) of 2019 expected to see crude stocks increase as supply outstrips demand.

However, last week’s sharp decline in the US inventories figure was certainly a big shock to the markets, providing the one major outlier to that oversupply story. The chart below highlights this break from the growing trend of growing stockpiles, with the drawdown of -7.3 million barrels representing the biggest drop since July.

The big question here is whether this is a mere blip within a wider trend of oversupply, or else the beginning of an easing in that story. If we do see further contractions to US stockpiles, there is a strong chance that we will see crude start to gain ground.


The big story of the week was always likely to come from OPEC, with the group once again joined by Russia in their desire to control oil prices. The eventual decision to cut production by 1.2 million barrels per day (bpd) for the first six months of 2019 provided crude prices with a welcome boost. That cut was split into an 800,000 bpd cut from OPEC, while non-OPEC members pledged to reduce their output by 400,000 bpd.

However, while we saw an initial boost to crude prices, it has clearly not done enough to spark calls for a bottom quite yet.

Looking at the Brent chart, we can see that the past week has seen the market break out of its steep decline, instead moving into a consolidation phase. Momentum appears to be on the rise, with the stochastic rising above 20 for the first time since mid-October.

Meanwhile, the four-hour chart provides a clear indication of the consolidation that remains in place throughout the past fortnight. A break through the $63.60 mark, coupled with a rally above trendline resistance, would provide us with greater confidence that we will be able to see Brent regain a more bullish standing in the wake of the production cut last week.

Until then, consolidation remains, with markets yet to truly show its hand on whether the 1.2 million bpd is going to be enough to shift us into a more bullish phase. The inventories story is another potential source of bullishness if we see that outlier followed up with another significant drawdown this week.

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