A bearish week in oil — but the bulls will run for the rest of 1Q

Last week saw several developments in the oil market that should have raised prices — yet it ended with bearish sentiment, with Brent easing to $62.10 per barrel, and WTI falling to $52.72.

The signals for the rest of the first quarter of 2019 are, however, on the upside. The market is extremely tight — especially in medium and heavy crude grades. If that continues, the global market will face a huge supply shortage, exceeding the conditions that drove oil prices above $86 last year.

There are several factors behind this. According to a S&P Global Platts survey, OPEC production in January was at its lowest level since March 2015. Crude output plunged to 30.86 million barrels per day ( bpd), a fall of 970,000 bpd from December, as new supply quotas went into force on Jan. 1.

On top of that, a potential return of supply from Libya has not yet materialized in the market — with ongoing unrest at the El Sharara oilfield, further restricting supply.

Strong imports from China are also deepening market tightness, with total crude imports at 10.4 million bpd, up around 2.3 million bpd from last year.

This a bullish development. China crude oil imports are still rising despite the trade dispute with the US. This means that the oil-price deterioration due to a global economic slowdown, as predicted by some, is completely wrong.

The US sanctions on Venezuelan oil exports are also affecting the market. Venezuelan oil production had already experienced problems prior to the sanctions, given the deterioration of infrastructure and internal labor problems. S&P Global Platts expects oil output to further fall to below 800,000 bpd by the end of February.

Counter to all this is that US producers continue to put more oil on the market, with output at a record 11.9 million bpd lately, with exports reaching 2.8 million bpd, the fourth-highest number on record.

Yet given the other factors at play, it is intuitive that the tightness in the market will transform into shortage before the end of the first quarter of 2019 — and that will boost prices.