Oil prices continued their downward trajectory in December after heavy losses in the last quarter of 2018. Concerns about over-supply were further complicated by an uncertain global economic outlook in response to US trade tariffs on China.
These losses were partially reflected on the forecourt, but domestic retail prices continue to lag behind international spot markets. Ice Brent crude oil futures ended the year at under $53/bl, a loss of more than $5/bl in December alone.
The heavy losses have helped to galvanise Opec and its non-Opec allies to agree to cut production by 1.2 mn b/d for six months at their meeting on December 7 in Vienna. Saudi Arabia will be shouldering most of the burden and will reduce output by nearly 1 mn b/d from November levels. On the non-Opec side, Russia will phase in production cuts with the full effect not kicking in until April. Prices could also be supported by a slow-down in US shale oil production, as current prices leave many wells operating at close to break-even.
The focus is starting to switch to the demand side of the equation after the IMF downgraded global economic growth forecasts from 3.9% to 3.7% in October. Argus estimates that global demand will still rise by 1.5 mn b/d in 2019, and markets will move back into balance at the start of the second quarter, but only if Opec delivers on its promised production costs.
Diesel prices look likely to hold up well in the near term relative to crude oil, despite disastrous UK sales of diesel cars. European refiners are struggling to meet new sulphur requirements for marine fuels from 2020, and sales of marine diesel look likely to rise substantially, cutting into availabilities for cars and trucks. The outlook for gasoline is far less rosy for refiners, particularly during the winter when US demand falls away and gasoline stocks in Europe are at their highest since October. Almost all the factors that injected a high level of volatility into the oil markets in 2018 remain. From stricter enforcement of sanctions on Iranian crude exports, to a slowdown in oil demand growth and steady shale production, oil markets will remain on tenterhooks.