Market Report & Analysis for 12/11/2018 Morning Edition

Morning Market Overview

The OPEC production cut discussions are now over as OPEC and their non- OPEC partners pledged to cut production by around 1.2 million bpd beginning in January. The discussion is now moving to… is it enough, will all participants comply to the agreement, how long will it take for global inventories to return to the five-year average and what will be the implications on prices?

All very typical questions that will be asked and answered many times over in the coming months as the projected period moves into the actual/historical period. For now, all analysts, are looking at the projections with a preliminary evaluation suggesting that supply should begin to underperform sometime late in Q1 which will then result in global inventories moving into a steady destocking pattern.

This is also based on an optimistic global demand profile. The public domain analysis will hit the media airwaves this week with the EIA Short Term Energy Outlook leading the way on Tuesday, Dec 11, with the OPEC projections released on Wednesday Dec 12 with the IEA oil market assessment finishing up with a release on Thursday morning Dec 13.

Market participants normally follow these three-monthly reports very closely, but we are certain they will all get even closer scrutiny as they will include the cuts by OPEC and its partners as well as the 8.7 percent cut in Canadian crudes. The market responded favorably to the OPEC agreement sending prices higher by a tad over 2 percent on Friday but well off the intraday highs hit shortly after the deal was announced. Market participants are approaching the latest supply news with a high level of caution (and they should) as global oil demand growth may be slowing and the cuts may not be enough to move global inventories into a sustained destocking pattern until well into Q2 versus our optimistic demand comment above suggesting the inventory trend could reverse as early as sometime in Q1 if all participants comply fully with the agreement.

Overall, we believe this is a positive outcome and coupled with the 325,000-bpd cut in Canadian production beginning in January OPEC and its partners have dodged a bullet insofar as a massive decline in prices and with a tad of patience prices would slowly work their way higher in the coming weeks and months. We believe they set the stage for oil prices to claw their way out of the bear market trend they have been in since prices peaked in very early October.