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Analysts look to 2019 crude oil price recovery after 2018 routing

The price of crude oil jumped in the first two weeks of 2019, and forecasts point to more gains as the supply and demand worries that plagued the market to close out 2018 begin to dissipate.

In a 10-day winning streak, prompt-month West Texas Intermediate crude oil futures on the New York Mercantile Exchange went from a settle at $44.61/bbl on Dec. 27, 2018, to $52.59/bbl at the Jan. 10 close. The Brent crude oil futures prompt-month contract, in a similar trend, climbed from $52.16/bbl on Dec. 27, 2018, to $61.68/bbl on Jan. 10.

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Both contracts stumbled in the week's closing session Jan. 11, but crude oil prices remain well above the $42.53/bbl low realized for WTI futures and the $50.47/bbl low for Brent on Dec. 24, 2018, as the U.S. dollar weakened and crude oil supplies grew.

In 2018, OPEC-plus members increased crude oil production to meet market demand amid the anticipated lost supply from Iran as U.S.-imposed sanctions were set to go into effect in November 2018, and with the additional loss of supply from Venezuela due to political unrest.

Saudi Arabia's oil production reached 11.3 million barrels per day in November 2018, well more than the 10.8 MMbbl/d the market had thought to be Saudi Arabia's peak production. At the same time, U.S. President Donald Trump took measures to allow some of Iran's biggest customers to continue importing its oil without violating U.S. sanctions against the Islamic Republic. The combination helped drive the price of crude oil futures to its lowest level since 2016.

Coupled with the supply-side woes were concerns of demand erosion, driven by the U.S. trade conflict with China, and worries of a slowdown in global economic growth.

But heading into 2019, the supply concerns were quelled as Saudi Arabia pledged to cut back production.

"The question at the end of 2018 was how would the Saudi's come back in terms of production," Mizuho analyst Paul Sankey said in a Jan. 9 CNBC interview. "What we have seen is clear statements of intent and actual less barrels on the market," he said.

Saudi oil minister Al-Falih on Jan. 9 confirmed the kingdom is on track to reduce output to 10.2 MMbbl/d in January. Al-Falih said Saudi Arabia would reduce its January oil exports by 800,000 bbl/d to 7.2 MMbbl/d and would export 7.1 MMbbl/d in February. The kingdom exported 8 MMbbl/d in November 2018.

Al-Falih said the country is serious about restoring balance to the market. At a press conference in Riyadh, he said Saudi Arabia is concerned about volatility in the oil market as the peaks and drops in prices are completely unjustified by the fundamentals.

The OPEC-plus cut establishes a more constructive 2019, analysts with Evercore ISI said Jan. 11. "A 1.2 [MMbbl/d] reduction from October levels (1.8 [MMbbl/d] factoring KSA/UAE increased output ahead of the announcement) has restored confidence in balances," the analysts said.

The Evercore analysts said that while OPEC action highlighted global GDP concerns and higher than expected supply in 2018, a combination of demand growth of about 1.3 MMbbl/d year over year, according to IMF forecasts, and a slowing U.S. supply, plus the end of limited Iran waivers should be the flip side.

Raymond James analysts have a similarly bullish outlook. "Despite the horrific end to 2018, our fundamental oil supply/demand models looks extremely bullish for 2019 and 2020," the analysts said in a Jan. 7 research note.

"Currently, the oil markets are indicating minimal upside from current levels over the next five years," Raymond James' lead analyst J. Marshall Adkins said, adding that given the firm's forecast for sizable 2019/20 drawdowns in global petroleum inventories, "we believe that oil should post 50+% gains from current levels over the next 12-18 months."

Adkins said the combination of OPEC plus Russia production cuts, the International Maritime Organization, or IMO, enforcement of a new 0.5% global sulfur cap on fuel content beginning Jan. 1, 2020, and slowing U.S. oilfield activity should drive global oil inventories well below normal on a days-of-consumption basis over the next two years.

Accordingly, Raymond James believes a robust back-end-loaded 2019 oil price rally is on deck. The analysts see full-year 2019 oil price forecasts of $62/bbl for WTI and $72/bbl for Brent, and expects this oil price momentum to carry into 2020, driving Brent prices to average $100/bbl or better in 2020.

Evercore held its Brent crude oil futures forecasts unchanged at $70/bbl and $75/bbl in 2019 and 2020, respectively.

Sankey's forecast for Brent crude oil is an average of $62/bbl for 2019 while analysts with Moody's expect the medium-term price band for WTI crude will be $50/bbl to $70/bbl.

Moody's analyst Terry Marshall said, "The key questions for 2019 are whether OPEC and Russia will maintain production discipline, and what happens when the current agreement expires in June."