On the Street analysts were ratcheting down their forecasts. The median estimate in Bloomberg’s consensus forecast for WTI in Q1 2019 fell from around $60pb at the time we published to around $55pb over the following weeks.
The futures market was in contango but with front-month contract and March contract trading around $52pb.
While there is reason to think prices can form a base and drift higher from here, the case for a strong, sustained rally looks weak – not least as investor sentiment is likely to stay fragile for as far as the eye can see. We think fears of a Chinese hard landing are overdone, particularly in view of signs that policymakers are gradually shifting to prioritising growth again. Yet a likely export slowdown in Q1– signalled by weak PMIs and consistent with order frontloading in recent months – coupled with the lagged impact from past CNY depreciation points to persistent deflationary impulses. These should keep investors cautious in the near term, or at least until more clarity emerges on Fed policy, Beijing’s stimulus tactics and the trade war.
In a benign macro scenario where the Fed pauses, Beijing opts for a mild dose of stimulus and there is de-escalation of the trade conflict, it is plausible to expect oil prices to veer back towards the $60s even as global economic growth shifts lower in 2019.
WTI rose from $49pb on date of publication to break up through $60pb on 29th March and continued up to $66.30pb on 23rd April before falling back in subsequent weeks.