At the December 6th and 7th meeting of the Organization of Petroleum Exporting Countries (OPEC), a decision was made (along with Russia) to cut crude oil production by 1.2 million barrels per day (bpd). Since that decision, crude oil futures (CL) prices have fallen 15%. CL has fallen 44.9% from the high reached on October 3rd to the low touched on December 24th. While this is not as dramatic a fall as the 75.8% drop from $107.68 to $26.05, that fall took almost 20 months. The current price collapse has taken less than 3 months and the fast reaction by OPEC and Russia shows they are likely to do whatever they can to make sure prices don't fall another 30%. The question of whether or not they can do anything to stem the price-push lower becomes a very real one for 2019. The two largest economies in the world have an ongoing trade dispute which had been slowing both economies (especially China) and the demand loss from that is not only current but is being factored into future plans for cap-ex both in the oil patch and beyond. OPEC is attempting to reduce the oversupply of crude by cutting production but they cannot control falling current and future demand.
A critical first week
President Trump gave the markets a very positive message regarding the U.S./China trade dispute (via Twitter) to start off the first trading week of 2019.
CL responded by jumping 3% to $46.53, although it has since fallen back to below $46.00. The Dow and S&P also jumped by approximately .75% showing again that it's not the Fed and it is not oil prices and it's not the Government shutdown pushing demand sensitive assets lower, its the trade war. So OPEC can cut, but for a meaningful rally to take hold, the perception fo more demand has to be stimulated. Even though there is a full trading day today in terms of the market close, it is still the last day of 2018. Today's price moves will be hard to ignore, but the rest of the week will set the tone for crude as the production cuts begin and OPEC comments on them. This is an important week for markets. It is a critical week for crude.