The oil market will be a tale of two halves in 2019, according to Wall Street forecasters. Oil analysts see prices recovering in the first six months of 2019, following a sell-off that has slashed the cost of crude by about 40 percent since October. But in the back half of the year, commodity watchers anticipate new headwinds for the oil market. The upshot is Wall Street expects a moderate recovery for oil in 2019. Investment banks see Brent crude, the international benchmark for oil prices, averaging about $68-$73 a barrel next year. Forecasts for U.S. crude mostly fall in a range between $59-$66 a barrel.

Last week, Brent briefly dipped below $50 a barrel for the first time since July 2017, while U.S. crude bounced off a 1½-year low at $42.36. Both benchmarks have lost more than 40 percent of their value amid darkening forecasts for growth in oil demand and surging output from top producers the United States, Saudi Arabia and Russia. While the outlook looks brighter in 2019, end-of-year research notes are filled with warnings that oil prices could spike or slump outside of that range. The risks range from closely watched macroeconomic factors like the U.S.-China trade dispute to underappreciated threats emanating from refineries in Asia.

The road to recovery

The key drivers behind the anticipated rally in the opening months of 2019 are OPEC policy and North American oil production. OPEC, Russia and several other producers in January will launch new production cuts that aim to remove 1.2 million barrels per day from the market. The producers began capping output in January 2017, but lifted the curbs in June ahead of U.S. sanctions on Iran, OPEC's third-biggest producer. The alliance will get a hand in course correcting from Alberta, Canada. Officials there have ordered producers to slash output by 325,000 bpd in order to drain brimming stockpiles of oil. Storage tanks have filled up because the province doesn't have enough infrastructure to transport crude.

Pipeline bottlenecks are also putting a lid on U.S. production growth. Takeaway constraints in the nation's top shale field, the Permian Basin underlying western Texas, are largely expected to persist at least through the first half. But in the back half of 2019, U.S. output flips from a bullish boost to bearish drag in oil markets. Once new pipes start bringing Permian oil to market, American output is expected to surge and put fresh downward pressure on crude prices. OPEC could offset that surge by extending its production cuts, which expire in June. The alliance will meet in April to determine whether market conditions warrant keeping the curbs in place.

Plenty of risk in forecasts

However, doubts about the effectiveness of the OPEC cuts underpin one of the most bearish forecasts on Wall Street. Ed Morse, global head of commodities at Citi, said the supply caps encourage U.S. drillers to put more crude on the market and "almost certainly" set up another sell-off. Iran's exports are also expected to drop further heading into May, when sanctions waivers for several of the Islamic Republic's biggest customers expire. The Trump administration granted the six-month exemptions in order to prevent a price spike. It stands that oil prices will play a major role in President Donald Trump's calculus when the waivers expire. "If prices stay in the low $60s, the Trump administration would have even more leeway not to grant waivers," said Michael Cohen, head of energy markets research at Barclays. "In our view, only if prices spike above the $80 level would the US not enforce continued significant reductions in Iran's ability to export."