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Yesterday crude oil rallied sharply to post its eighth consecutive positive close. This marked the longest stretch of back-to-back gains for Brent and WTI since February 2012. Crude oil has certainly staged a strong recovery after a disastrous month. Brent and WTI lost around 18-20% in the four weeks following the OPEC meeting at the end of May. The sell-off began as investors expressed their disappointment at the agreement reached by OPEC and non-OPEC producers. All sides promised to extend the 1.8 million barrel per day (bpd) output cut by nine months to March 2018. However, there was no appetite to make deeper cuts. This was viewed as a mistake. Global inventories remain close to record highs as oil production from parties not subject to the agreement has increased. US shale oil has risen sharply as has output from OPEC-exempted members such as Nigeria and Libya. Just last week Libya’s production hit a new multi-year high when it topped 900,000 bpd. Libyan officials expect output to breach 1 million barrels per day (bpd) by the end of July.

Yet despite these downside pressures, both WTI and Brent have recovered significantly since hitting multi-month lows on 21st June. There could be little doubt that both contracts were looking oversold and were due a bounce-back on some short-covering profit-taking. There were also a number of sparks which helped the recovery along. Firstly, there has been an uptick in US crude inventories over the past fortnight. On top of this last week US crude production registered its biggest decline since Aug 2016, dropping by 100,000 bpd to 9.25 million bpd. This put a dent in predictions that US output was set to top 10 million bpd by year-end. Also, the US oil rig count fell by 2 to 756, the first drop in almost 6 months. However, it may be too early to call time in US shale oil. The overall oil and gas rig count slipped in Alaska and Colorado. But it continues to rise in Texas which is the centre of US shale production. It’s also worth noting that despite a doubling in the rig count over the past year, there are still less than half the number of rigs operating when compared to the peak in 2014.

In addition, there are concerns that OPEC/non-OPEC production cut compliance could start to unravel. Firstly, there are growing tensions between OPEC members as Saudi Arabia squares off against Qatar. This could lead to a reluctance of OPEC members to act in concert with one another. On top of this Russian output tends to pick up over the summer which may be a reason to break their agreement, particularly as everyone is making less money with crude back below $50.

Technically, the current rally may need to catch its breath before it can make further gains. But even then there’s a chance that the upside from here could be limited. After all, we’ve seen a number of lower highs and lower lows since February. A daily WTI chart (courtesy of Investing.com) is shown below.

https://www.spreadco.com/assets/pm.04.07.png

I’ve drawn on two Fibonacci Retracements. The first is from the high on 23rd February this year to the low on 21st June. The second is from the post-OPEC meeting high on 25th May to, again, the 21st June low. Both retracements suggest that last night the front month WTI contract ended close to the technically significant $47 level. This marks the 50% retracement of the May-June sell-off and the 38.2% Fibonacci Retracement (not, as the study suggests the 61.8% level) of the Feb-June move. Prices have pushed beyond here a bit this afternoon. But it’s well worth keeping an eye on this level over the coming few sessions. If crude begins to struggle to break away from here over the next few days then it could fall off once again. However, looking at the lower highs over the past few months, it may have a bit more upside to go first. Time will tell.


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Spread Co is an execution only service provider. The material on this page is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by Spread Co Ltd or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.This material has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. As a marketing communication it is not subject to any prohibition on dealing ahead of the dissemination of investment research, although Spread Co operates a conflict of interest policy to prevent the risk of material damage to our clients.

 

Posted by David Morrison

Tagged: Bulletin PM

Category: PM Bulletin


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