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Back in early February crude oil had broken below $30 for the second time in 2016 and many analysts felt that it had further to fall. However, it subsequently bounced and went on to rally through to early June, effectively doubling in price over this period. One of the biggest drivers for this move (other than both the WTI and Brent oil contracts being significantly oversold) was the story that a number of oil producers were considering an output freeze. Traders subsequently focused on every utterance from OPEC and non-OPEC producers alike ahead of a crucial meeting in Doha on 18th April. The meeting broke down without any agreement. Nevertheless, there was barely any interruption in oil’s rally as both WTI and Brent went on to top $50 early in June.

There was a subsequent pull-back and both contracts retraced by around 50%. This came as analysts revised down their forecasts for future demand growth and as global production picked up. Then there was a rally between August and October, which seemed largely technical. However, this was given a fresh boost following an OPEC side meeting at the International Energy Forum in Algeria at the end of September. Suddenly, there was talk not of an output freeze but outright cuts. But once again, neither WTI nor Brent was able to push much beyond $50 per barrel and prices retreated once again - until the beginning of this week.

On Tuesday crude oil put in its best one day performance since April, soaring by around 6%. The rally looked like it was mainly a short-covering bounce after WTI and Brent hit multi-month lows on Monday. However, the trigger appeared to come on the back of renewed hopes that OPEC will somehow manage to agree to production cuts when it meets later this month. Some OPEC-member energy ministers are expected to meet informally in Doha on Friday in an effort to reach some form of accommodation ahead of the full OPEC meeting on 30th November.

So from now on it looks as if the momentum is to the upside, and crude should benefit from any remotely positive comments from OPEC and non-OPEC producers. That is, any chatter that members are close to agreeing to production cuts or that accommodation is close to being reached between Saudi Arabia (OPEC’s major producer) and countries such as Iran, Iraq, Nigeria and Libya who feel they should be exempt from cuts. Certainly, this kind of talk is trumping other considerations. Just this week we had bearish inventory data from both the American Petroleum Institute (API) and the Department of Energy’s Energy Information Administration. Yet the resulting sell-off in crude was quickly reversed after Russia’s oil minister announced that there was a good chance of OPEC members reaching agreement and that Russia would support the cartel’s decision.

So we can expect OPEC and Russia to attempt everything to jawbone the oil price higher between now and 30th November. Then they’ll hope to push through some consensus over coordinated cuts. This may or may not be agreed. But even if it is, ensuring compliance will be a big issue. In the meantime, if US inventories continue to build, it may prove difficult to push prices back above $50.

Daily chart of front-month WTI courtesy of investing.com:

https://www.spreadco.com/assets/17.11.16.png

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Posted by David Morrison

Category: PM Bulletin


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