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Crude oil futures' sharp retreat halts; market sentiment remains bearish

Following the prior day routing down $3.64 to a settle at $46.24/bbl, a level not seen since August 2017, the front-month crude oil futures contract on the New York Mercantile Exchange recovered modest ground Dec. 19, reaching a $48.00/bbl high before closing the session up 96 cents at $47.20/bbl.

Plagued by a less than optimistic economic outlook and the uncertainties regarding OPEC-plus production cuts, the market vacillated, answering three consecutive days in sharp retreat with modest retracement but no significant indication of a full-on recovery back to recent highs.

Reports that Russia increased its oil production to a record high 11.4 million barrels per day prompted the latest sharp retreat as the market assumed it meant the country would not comply with the agreed-upon oil production cuts, PRICE Futures Best analyst Phil Flynn said Dec. 19.

OPEC members agreed to cut production by 800,000 bbl/d, and Russia agreed to trim output by 400,000 bbl/d at a Dec. 7 meeting. The cuts are slated to begin in January 2019.

The U.S. reportedly is producing 11.6 MMbbl/d, with projections that this could rise to more than 12 MMbbl/d in 2019. That may have to change if prices stay weak, Flynn said.

Focused on Russia and U.S. supply growth, the market ignored a force majeure that Libya state-owned National Oil Corp. declared on operations at its biggest oilfield, reducing supply by 315,000 bbl/d. The market further ignored Venezuela production, which, at 1.46 MMbbl/d, was slightly better than the 1.43 MMbbl/d recorded in October but down from more than 2 million bbl/d on the year.

While supply uncertainties drive market volatility, rising concerns for the global demand outlook are feeding additional downside into the market.

With supply possibly not receding as quickly as thought, market sentiment remains decidedly bearish as participants anticipate a slowdown in global oil demand, Dominick Chirichella, director of market insights at DTN, said Dec. 18.

Oil has lost confidence in the global economy, Flynn said.

"Oil is weak because many demand signals are blinking red, and supply cuts won't matter if the bottom falls out of demand," Mizuho lead analyst Paul Sankey said in a Dec. 18 research note.

"Downward global GDP revisions keep coming, the risk of recession is rising, equity markets reflect it, flight-to-safety pushes the dollar higher, and those factors lead oil lower on demand worry," Sankey said.