Incisive market commentary from David Morrison

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Tory Poll Lead Narrows Sharply - Video Update
31 May 2017
S&P 500 and NASDAQ break winning streak
31 May 2017
Sterling swings on polls - PM Bulletin
30 May 2017
Equities drift after long holiday weekend - AM Briefing
30 May 2017
Crude oil slumps on OPEC disappointment - AM Briefing
26 May 2017
OPEC disappoints while FOMC minutes provide cheer - Video Update
25 May 2017
OPEC expected to agree 9-month extension - AM Briefing
25 May 2017
Look-ahead to OPEC - Video Update
24 May 2017
Markets quiet ahead of FOMC minutes and OPEC - AM Briefing
24 May 2017
Crude oil update - OPEC meeting in focus - PM Bulletin
23 May 2017
Markets shrug off atrocity in Manchester - AM Briefing
23 May 2017
Equities mixed, but supported by oil
22 May 2017
Nerves steady after firmer close on Wall Street - AM Briefing
19 May 2017
Political fall-out continues to weigh on markets - Video Update
18 May 2017
Slide in European indices accelerates - AM Bulletin
18 May 2017
Trump’s woes hit markets - Video Update
17 May 2017
Trump’s woes lead to market wobble - AM Briefing
17 May 2017
EURUSD hits six-month high - PM Bulletin
16 May 2017
Crude oil extends rally - AM Briefing
16 May 2017
US inflation data and retail sales in focus - AM Briefing
12 May 2017
Crude oil recovers after “flash crash”- Video Update
11 May 2017
Crude oil soars while equities drift - AM Briefing
11 May 2017
Are investors too complacent? - Video Update
10 May 2017
Investors rattled after Trump fires FBI head - AM bulletin
10 May 2017
Crude oil’s “flash crash” leads to OPEC desperation - PM Bulletin
09 May 2017
Equities rally as oil steadies - AM Briefing
09 May 2017
Forex: Top Ten Tips for beginners - Trading Guides
08 May 2017
Markets little moved after Macron win - AM Briefing
08 May 2017
Payrolls in focus - AM Briefing
05 May 2017
NFP look-ahead - Video Update
04 May 2017
FOMC hints at rate hike in June - AM Briefing
04 May 2017
FOMC look-ahead - Video Update
03 May 2017
Apple disappoints on sales numbers - AM Briefing
03 May 2017
CFD Trading Tips - Trading Guides
02 May 2017
European traders return after May Day - AM Briefing
02 May 2017
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Crude oil has fallen sharply over the past month. Both WTI and Brent are down around 13% since 11th April and that’s despite a partial recovery which followed a price plunge at the end of last week.

In last Friday’s Asian Pacific session crude oil experienced its very own “flash crash” as prices plummeted close to 4% in less than 15 minutes. There was no one single reason for such a move. Typically a flash crash comes about on a combination of a sudden volume pick-up in a thin market which triggers traders’ algorithms and takes prices through significant technical levels. This triggers sell-stops which exacerbates the move to the downside. Some of the most egregious examples (such as last October’s sterling flash crash) have been blamed on a “fat finger” - that is, a trader inadvertently putting in the wrong-sized order. For instance, selling 100,000 contracts rather than 100. But there’s been no indication that this is what happened last week.

The move last Friday has done extensive technical damage and has taken prices back below the levels seen early last November. This was in the days leading up to the OPEC meeting when the world’s most significant producers (except the US) agreed to output cuts of close to 1.8 million barrels per day. Back then, there were many observers (myself included) who doubted that any such deal could be reached. I then doubled down by saying even if producers agreed to output cuts, they were highly unlikely to stick to a deal as there would always be at least one country prepared to cheat. Well, I was soon eating my words as compliance has proved to be exceptionally high- way better than the 60% or so historically seen with OPEC quotas.

But what is now painfully apparent is that the cuts haven’t worked. One reason is that US shale oil production has risen sharply. The current rig count as recorded by oil services provider, Baker Hughes, stands at 877, up by 462 from the same time last year. This has caused analysts to raise their forecasts for US production, saying it could hit an all-time production high of 10 million barrels per day by year-end. This would see it consolidate its position in the top three, just shy of output from Russia and Saudi Arabia.

Also, analysts have pointed out that a production cut is not the same as an export cut. In other words, while the world’s major oil producers may be cutting back on production, that hasn’t stopped them from keeping up exports using existing inventories. But on top of that there’s increasing evidence that global demand for crude is falling, despite a pick-up in world economic growth. That would explain how global crude inventories remain at record levels.

Oil managed to steady a touch on news that OPEC and other major producers were prepared to extend their output cut agreement beyond June this year. The latest speculation is that global producers (but crucially not the US) will agree to extend the cut to the end of 2017 or even to the end of the first quarter of 2018. There is even a suggestion that producers may cut output by more than the current target of 1.8 million barrels per day. Of course, oil traders are used to this kind of jawboning from OPEC and other producers, notably Russia. And there can be little doubt that the price action over the past month must be causing panic in some quarters, most notably Saudi Arabia - given their desperation to get the best price possible for the Aramco IPO. But talks have to kick in to high gear now as the next biannual OPEC meeting takes place on 25th May - in just over a fortnight.

Of more immediate concern is the latest update on US inventories. The American Petroleum Institute (API) will report after tonight’s close while the US Department of Energy releases the official data tomorrow afternoon. There some mild support for WTI between $42.70 and $42.00 with $39-40 (last August’s low) coming in below there. But another significant inventory build has the potential to blow these levels out of the water. One would think that crude is well overdue a bounce given its recent slump. But traders are nervous, and if WTI and Brent fail to push back above $47 and $50 respectively in the near-term, further weakness is possible.


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Posted by David Morrison

Category: PM Bulletin

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