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 Tuesday 23 August 2016

PM Bulletin: Crude continues to slide

 

 

Crude oil fell sharply yesterday and the sell-off continued this morning, despite a (modest) pull-back in the US dollar. As this chart of front-month WTI shows, there’s been a strong upside move in oil since the beginning of August. This bounce-back coincided with the announcement of a rate cut and further stimulus from the Bank of England which was quickly followed up by renewed talk of a production freeze by major producers.

PM Bulletin

These two events came just at the right time to halt the sell-off that began early in June. Back then, both Brent and WTI had pushed up above $50 per barrel, representing a near 100% rally from the multi-year lows hit earlier in the year. In June it looked as if crude was set to consolidate and head higher with many analysts calling for $70-plus by year-end. Of course, there’s still plenty of time for them to be proved right, especially if claims that supply/demand fundamentals are set to come back in balance by the fourth quarter prove correct.

However, turning points in oil usually come when speculators pile in too heavily on either the long or short side. When this happens, it doesn’t take much to trigger a stampede to the exits if speculators get wrong-footed and are then forced to cover. It happened in March on production freeze talks and again this month. The first time round crude continued to rally despite producers failing to reach agreement at the Doha meeting in April. Oil went onto break above $50. But this time round it looks as if the weaker shorts were squeezed out before crude could retest the June highs.

So this week will be a big test for oil traders. It could be that the current sell-off is nothing more than a mild correction before crude takes another leg up. Alternately, the pull-back could suggest that the sell-off which began in June isn’t over yet and the failure to take out the old highs means crude will now retest $40.

The fundamental supply/demand outlook is critically important. As things stand we have Saudi Arabia, Iran, Iraq and non-member Russia producing at, or close to, maximum capacity. On top of this US production is also picking up. This being the case it’s difficult to see how an output freeze will do much to put a dent in global stockpiles which stand at record high levels. As far as demand growth is concerned, the outlook is uncertain. But it’s not as if the global economy is firing on all cylinders at present. Nevertheless, it takes time to put together all the pieces in the puzzle. In the meantime, investors will continue to react to US inventory data and analysis from trade bodies. We can also expect oil to react to Janet Yellen’s big speech on Friday, with traders focusing on any comments she may make on the strength (or otherwise) of the US economy.

David: As far as demand growth is concerned, the outlook is uncertain. But it’s not as if the global economy is firing on all cylinders at present.

Disclaimer:

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.

 

Posted by David Morrison

Tagged: Bulletin

Category: PM Bulletin


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