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Crude oil took another tumble today. This latest move means that both WTI and Brent are now trading at their lowest levels since mid-November last year. This is of particular significance as the low back then preceded a key OPEC meeting just a fortnight later. This was when OPEC together with a number of significant non-OPEC producers came up with an agreement to cut output. The idea behind this was to attempt to address oversupply issues in the market which were contributing to a decline in the oil price. It’s worth remembering that crude was trading below $30 in early 2016 having fallen from over $100 eighteen months before. Despite putting in a decent recovery which took prices back above $50, crude looked vulnerable to further weakness. Oil producers were desperately raising production in an attempt to boost revenues even as prices declined. Yet global growth rates had failed to recapture pre-crisis levels and this contributed to global inventories hitting record highs.

In the months leading up to the November OPEC meeting, the prevailing wisdom was that oil producers would find it impossible to agree to any form of output freeze, let alone a cut. An attempt reach agreement to freeze production back in April 2016 ended in failure. Not only that, but experience suggested that even if all sides signed up to a deal, there would always be a few participants who cheated. However, ahead of the November OPEC meeting rumours began to swirl that participants were serious about taking measures to combat weak prices. Oil started to rally and then surged higher once the 1.8 million barrels per day output cut was announced. Things became even more encouraging early in 2017 when it became apparent that compliance amongst producers, particularly within OPEC, was very high.

Many producers were hoping to push prices back up to $60 per barrel or so. Yet crude was unable to break above the mid-$50 area. US production increased significantly over the past twelve months, helped initially by higher prices but also through new technologies and stunning efficiencies. It soon became apparent that the oil market needed something else to keep it elevated. Unfortunately, last month’s decision to extend, but not deepen, output cuts wasn’t enough. The selling momentum has built up steadily, helped in no small measure by a series of bigger-than-expected US inventory numbers.

It’s a long wait until the next OPEC meeting on 30th November. But if oil continues to fall there’s a chance they hold an emergency meeting. In the meantime, investors will have to deal with weekly updates on US inventories. If stockpiles continue to grow, then the downside pressure on oil prices should continue. But it’s worth remembering that oil is a traders’ market and it’s currently looking somewhat oversold - technically at least. It would only take a rise in geopolitical tensions or a significant inventory drawdown to see prices bounce back sharply. So watch out for the latest US inventory updates after tonight’s close and again tomorrow afternoon.

https://www.spreadco.com/assets/20.06.17v1.png

Chart courtesy of Investing.com

 

Posted by David Morrison

Category: PM Bulletin


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