Monday, September 10, 2018

Just boring variation not a crude rally or slump

Week-on-week, the picture remains one of a crude oil market in which benchmark prices are firming up, yet both Brent and WTI futures remain within that very predictable range of $60-80 per barrel (see chart left, click to enlarge). 

A fortnight ago, bolstered largely by the tightening of US sanctions on Iran or rather the perception of tightening, Brent began a two-week climb towards $80 per barrel, as the WTI strengthened above $70. 

Yet again, bullish prophets hit the airwaves suggesting a $90 per barrel Brent price in light of tightening of a crude market with "very little spare capacity." In some market quarters it is being debated that global spare capacity is now less than 1 million barrels per day (bpd). 

The Oilholic thinks the bulls ought to calm down a bit. Agreed, US President Donald Trump's squeeze on Iranian oil exports is making buyers nervous, particularly India and Japan. And in 2019, it would be reasonable to expect Tehran's production to be well below its current 3.6 million bpd+ production mark to around 2.4 million bpd. 

However, Saudi attempts to compensate (or over-compensate) for a decline in Iranian output would not go unnoticed in Moscow. Russia has already indicated that it would like to raise production, and amicable as things might be with OPEC, if they want to, they would increase production. 

The market's problem right now is that it is missing strong breakout factors - both bearish and bullish ones. Bearish threats of global trade wars, direction of emerging markets, and an unraveling of the OPEC and non-OPEC agreement continue to lurk around. Similarly, bullish factors such as the industry under-investing (a very visible concern) and running out of spare capacity to mitigate supply shocks also persist. 

So price positive as well as negative sentiments are still not strong enough to decisively pull oil futures one way or another, with US turning less and less to the global supply pool courtesy of rising domestic production. Therefore smart money says what we've seen over the last two weeks was not a rally and nor has there been any noticeable slump. All that has transpired is variation within a predictable floor and ceiling. That's all for the moment folks! Keep reading, keep it 'crude'!

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© Gaurav Sharma 2018. Graph: © Gaurav Sharma, September 2018.

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