Pipeline for crude oil leading to refinery

The attention of investors was squarely focused on the steep declines in U.S. stocks from late September through year end. Yet, one of the most unexpected stories of the fourth quarter was the nearly 40% plunge suffered by global crude oil prices in the final three months of 2018.

The collapse caught many market participants on their back feet in part due to the growing chorus of
commentators in the late summer calling for $100 per barrel oil. Those predictions were largely driven by expectations of steady global demand and sanctions on Iranian oil exports scheduled for early November. During one historic stretch ending in mid-November, U.S. West Texas Intermediate (WTI) crude oil prices declined for a record twelve consecutive days. Lower oil prices have historically been a positive for U.S. consumer spending given their transmission to lower gasoline prices. In the corporate sector, lower crude oil prices often result in reduced input costs for large domestic industries including airlines and chemical producers. On the other side of the ledger, lower oil prices present challenges for
companies engaged in the exploration for and production of oil as well as regional economies with significant exposure to energy sector industries.

To what can we reasonably attribute the nasty bear market in oil? Most commentators pointed to one or more of the following factors: concerns about weakening demand for oil caused by what many fear is a global economic slowdown, global oversupply driven by record U.S. oil production and the impact of temporary waivers on Iranian oil sanctions given to eight countries by the Trump administration. In our view, it seems like the latter two items best explain the lion’s share of the recent collapse in oil prices.

Read full January Market Review.

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