FILE – An oil storage tank and crude oil pipeline equipment is seen at the Strategic Petroleum Reserve in Freeport, Texas, U.S., June 9, 2016.
NEW YORK — Oil bulls trying to push the crude market higher finally waved the white flag Wednesday, triggering the biggest rout in a year on concerns that stubbornly high inventory levels would persist despite supply cuts.
Prices had been locked in the tightest trading range in over a decade as traders and speculators piled into bets that oil prices would rise after the world’s top producers cut output.
For weeks, they shrugged off record high inventories in the United States until Wednesday, when the market finally blinked.
Global oil benchmark, Brent and U.S. crude’s West Texas Intermediate prices plunged more than 5 percent — the biggest drop since February 2016 — an unwelcome reminder of the darkest days of a two-year price war that left many U.S. shale producers with beleaguered balance sheets.
The move also lifted trading volumes to the highest since early December, with over 430,000 contracts in Brent crude for May delivery and more than 911,000 contracts of WTI for delivery in April changing hands.
The selloff continued Thursday, as U.S. crude hit a low of $48.79 a barrel in early trading, its first drop below $50 all year, while Brent crude touched a low of $51.60 a barrel, its lowest since Dec. 1.
Industry players were divided on whether the price slide would continue or be short lived, given producers’ adherence to a pledge to rein in output and prop up prices that have languished for over two years owing to a glut.
“The high level of uncertainty that has kept the oil complex trading in a relatively narrow trading range since late last year has been replaced, at least for the moment, by a bearish market sentiment,” said Dominick Chirichella, senior partner at the Energy Management Institute in New York.
“The discussion will now center around whether or not Saudi Arabia is willing to give back market share to U.S. producers … or are they ready for yet another round of the market share war.”
So far, there has been no indication that Saudi and OPEC would extend the cuts beyond what is announced or allow the U.S. to claw some of its market share.
Suhail bin Mohammed al-Mazrouei, energy minister for the United Arab Emirates, told Reuters on the sidelines of an industry conference in Houston that the plunge in oil prices was temporary and prices would rise as OPEC complies with output cuts.
Still, the rise in inventories was “a worry,” he admitted.
Despite record exports in U.S. crude oil, inventories have ballooned to a new high week after week, threatening a speedy rebalancing of the market.
Saudi Oil Minister Khalid al-Falih even admitted on Tuesday inventory drawdowns were taking longer than he had expected for the first two months of the year.
The crash Wednesday also tested key technical levels of support established this year and dropped below their 100-day moving averages — a key metric for chart watchers — for the first time since the OPEC deal was announced.
“The move down is in oversold territory, but otherwise, there is very little evidence that it will end,” Dean Rogers, senior analyst at Kase & Company, said of WTI.
A small upward correction might take place first, but odds strongly favor a continued decline toward the next major target at $48, he said, adding that for Brent, the move lower is poised to continue to at least $52.60 and likely $51.60 and lower over the next few days.
Still, for the long term, most market participants continue to remain bullish.
Trade in options — that give the holder the right to buy or sell at a specific price — signaled that the market does not expect prices to move much lower than current levels.
“Their [OPEC’s] response may very well be a continuation of cooperation to limit their oil production, perhaps for a little longer than they had hoped and this should help keep a floor under oil prices,” said Fawad Razaqzada, technical analyst at forex.com.
“Indeed, despite today’s sharp selloff, I remain bullish on oil and still expect to see $60-$70 a barrel by the year end.”
Crude oil prices have turned modestly lower for Friday’s trading, narrowing any gains seen for the commodity earlier in the week. Prices have specifically stalled as traders are beginning to call into question the production cuts previously promised by OPEC nations. Oil prices have initially strengthened into 2017 on expectations of these productions cuts, so any data to the contrary may cause crude oil to decline further off of the standing yearly high at $55.21.
Technically crude oil remains in a long term uptrend, as the commodity continues to trade above its 200 day SMA (Simple Moving Average). This average now stands at $47.24, which continues to stand as long term support for the commodity. Traders should be mindful however, that crude prices are now trading back below the displayed 10 day EMA (exponential moving average) at $52.61. Typically this is a sign of short term weakness, and if crude stays below this point it may suggest a further slide in price starting next week.
It should also be noted that today’s intraday price action has crude oil set to end the trading week with the creation of an inside bar. If the commodity closes at present values, crude oil would have failed to create a new high or low for today’s session. This means breakout traders may use Thursday’s high and low as values of support and resistance to plan for the markets next breakout.
Bullish breakouts may begin for crude oil above Thursday’s high of $53.47. A breakout above this point would place crude back above the previously mentioned 10 day EMA, and open up the market to retest the standing yearly high. Alternatively, Thursday’s low of $52.10 remains a key value of price support. A bearish breakout here would suggest that crude is retracing more of its previous gains, and open up a test of the standing 2017 at $50.69.
After generating positive results last week amid traders’ optimism over the production cut from major producers, including Saudi Arabia and Kuwait, crude oil prices came back under pressure in Monday’s trade, thanks to the threat of increasing Iran’s exports and rising U.S. supplies. Iran started increasing its exports over the last couple of months from oil held in tankers at sea.
Iran sold almost 13 million barrels of crude oil held in tankers at sea, indicating a smart move of enhancing its market share, when fellow producers are slashing their supplies. While Iran’s biggest rivals, including Saudi Arabia and Kuwait, announced production cuts of 485,000 and 131,000 barrels per day respectively for the first quarter this year.
Iran’s strategy of selling oil held at sea could have negative repercussion over the production cut agreements between 24 countries. Brent crude oil prices were trading almost 13 cents lower in Asian trade on Monday from the recent settlement, while U.S. West Texas Intermediate oil prices were trading 20 cents lower from earlier close.
The threat of rising of U.S. production is also weighing on crude oil prices, as traders are realizing that North American producers are making a stronger than expected comeback.
U.S. oil rig counts have increased since summer of the last year. Last week, Baker Hughes reported a 10th straight week of growth in U.S. oil rig counts to the highest level in the last 13 months. U.S. oil production increased mostly at a mid-single digit rate in the last six months, thanks to improving prices and declining break-even points.
U.S. producers have slashed their break-even levels to below $50 a barrel, settling strong footholds to expand volumes at current oil prices. Therefore, U.S. producers are ready to make a strong rebound in the coming days, which could stun the market participants. Several U.S. producers have announced increased spending plans for FY2017 after significant cuts in the last three years.
Oil jumped on optimism OPEC will agree to a supply-cut deal, while industrial metals rebounded from last week’s losses and the euro strengthened. The dollar traded near a January high, with traders all but convinced the Federal Reserve will pull the trigger on a rate hike in December.
Crude rose as much as 1.4 percent in New York, adding to a 5.3 percent advance last week. With an OPEC meeting next week in Vienna, Iran’s Oil Minister said it’s “highly probable” members will reach a consensus, according to comments published by the country’s Shana news service. The Stoxx Europe 600 Index declined, while Japan’s Topix index rallied for an eighth day. A gauge of the greenback fell from its strongest point since Jan. 29 as the euro strengthened 0.4 percent. Nickel, copper and zinc gained at least 2 percent.
While the prospect of Donald Trump as U.S. president unnerved markets in the lead up to the election, his vow to boost infrastructure spending has turbo-charged bets on a Fed hike, underpinning the dollar’s steepest two-week rally versus the yen since 1988. Fed Chair Janet Yellen told lawmakers that the central bank is close to boosting borrowing costs, with speculation the president-elect will bolster fiscal stimulus already fueling bets on further policy tightening in 2017. In Europe, Angela Merkel said she’ll run as German chancellor again, news that may calm markets after an exceptional few weeks.
“We have little doubt that the world is shifting into a new paradigm where politics and fiscal policy will gain far more prominence,” Philip Borkin, a senior economist in Auckland at ANZ Bank New Zealand Ltd., said in an e-mail. “Markets are indeed behaving that way already as the ‘Trump trade’ of higher yields and the dollar remains the centerpiece of market moves.”
The Stoxx Europe 600 Index fell 0.2 percent as of 8:18 a.m. in London.
The MSCI Asia Pacific Index added 0.3 percent, with a gauge of Chinese shares traded in Hong Kong climbing 1.1 percent to head for the steepest regional gain.
In Japan, the Topix rose 1 percent to post its longest run of daily advances since August last year. The Nikkei 225 Stock Average climbed more than 20 percent from this year’s low to enter a bull market last week, and Citigroup Inc., AllianceBernstein and Bordier & Cie all see further gains for Japanese shares.
S&P 500 Index futures increased 0.1 percent to 2,183.25. U.S. equities extended the rally sparked by Trump’s election win last week, with small-cap shares the biggest beneficiaries.
West Texas Intermediate crude rose for a second day, adding 1.3 percent to $46.28 a barrel after climbing 0.6 percent on Friday. Brent gained 1.4 percent to $47.50 per
Oil has rebounded since hitting the lowest in almost two months last week as members of the Organization of Petroleum Exporting Countries began making renewed diplomatic efforts before their meeting Nov. 30 to finalize the output deal informally agreed to in September. The group is seeking to trim output for the first time in eight years, a plan that’s been complicated by Iran’s commitment to boost production and Iraq’s request for an exemption to help fund its war with Islamic militants.Nickel rallied from a two-week low as industrial metals renewed their advance amid optimism over demand in China and the U.S.
The metal used in stainless steel added 3 percent on the London Metal Exchange after prices slumped 3.6 percent on Friday to close at the lowest since Nov. 4. Copper jumped 2.9 percent as money managers boosted their bets for price gains on the Comex to the highest ever. Gold rose 0.4 percent.
The yen touched 111.19 per dollar following last week’s 4 percent slide, the biggest since July. The currency last traded at 110.89. Strategists are raising forecasts for dollar gains against the yen at the fastest pace in more than a year after a Bank of Japan fixed-rate bond-buying operation — that attracted no offers — pulled 10-year Japanese government debt yields back toward zero.
“The trend for yen weakness will continue amid a very violent and volatile market next year,” said Shusuke Yamada, the chief Japan foreign-exchange and equity strategist at Bank of America Merrill Lynch in Tokyo. “Even without any additional expansion of stimulus by the BOJ, the power of policy easing will strengthen automatically.”
Traders see a 98 percent likelihood of the Fed raising interest rates at next month’s meeting, fed funds futures show.
The Bloomberg Dollar Spot Index dropped 0.2 percent, as the euro and the Mexican peso gained 0.4 percent. The South Korean won fell the most among major currencies versus the greenback, slipping 0.3 percent.
The debt market took a breather, with 10-year Treasury yields slipping two basis points to 2.34 percent following last week’s 21 basis-point surge.
After being largely left behind in the era of cheap money, savers may ultimately emerge as the big winners in a world where Trump is president. Yields on 30-year Treasury bonds have risen about a half-percentage point since the election as Trump’s ambitious spending plans prompt traders to ratchet up their expectations for inflation and growth.
Iranian Oil Bijan Zanganeh says total oil production from the country is close to a pre-sanctions peak of 4 million barrels per day. Fil ephoto by Maryam Rahmanian/UPI
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TEHRAN, Oct. 17 (UPI) — With the door opening to foreign energy investors, Iran’s oil minister said the country’s total crude oil production is rising to pre-sanctions levels.
According to the Organization of Petroleum Exporting Countries, of which Iran is a member, secondary sources reported total crude oil production at around 3.7 million barrels per day, about a half percent higher than the previous month. According to Oil Minister Bijan Zanganeh, the figure was closer to 4 million bpd, a level he said was near Iran’s peak from before nuclear-related sanctions were enacted in 2012.
Iran did not report its production levels for September directly to OPEC, whose members are reviewing coordinating with non-member states to hold production levels steady. Iran in the past has expressed reservations about cooperating with such a deal, saying it needed to regain a market share lost to sanctions.
Zanganeh said production cuts were not a matter up for consideration and any concrete figures for Iran would be discussed when parties to an OPEC output proposal reached last month in Algeria meet next in November.
Iran told OPEC it produced 3.63 million bpd in August, about 10,000 bpd less than reported by secondary sources. Iran aims to boost crude oil production to around 5.7 million bpd by 2021.
Iran said it would start taking applications Monday for oil and gas projects from potential foreign suitors. The state-run National Iranian Oil Co. said companies interested in becoming qualified bidders have until Nov. 19 to submit their credentials.
Zangeneh said new deals with foreign companies could be signed by March under the new contract terms.
The Algeria OPEC meeting has set Crude Oil on a Bullish Course that few can deny. The impressive fact of the recent run-up aligns with the seeming agreement from major sovereign Oil producers to cap production. The verbal intervention has historically failed to see follow-through the unison in managing an output cut is encouraging Oil bull’s to not give up now.
OPEC is looking to take production lower from 33,000,000 to 32,500,000 barrels per day by the Cartel. There are still questions as to whether or not all members will be on board once the production cuts are specifically divided and assigned. This week, Istanbul has the World Energy Congress where many high-ranking Oil ministers and Energy Company CEOs will work to see how to support the Oil market given the uptrend in the price of Oil.
The most encouraging sign today came from President Putin who noted that Russia is ready to join OPEC effort to limit Oil supply. Such signs of an agreement have encouraged the increasingly large number of Oil Bulls as shown by managed money positions via the CFTC’s Commitment of Trader’s report. Friday’s report showed that largest number of bets on rising Oil since 2014. The optimism in Oil is also bleeding into Commodity backed currencies like USD/CAD that has aggressively moved lower at the start of the week.
Trading View D1 Crude Oil Price Chart: Very Hard To Credibly Bearish Above $50
The chart above shows a few complementary technical development that places Bullish momentum in charge. Starting with the simple analysis, the price above the trendline (black) drawn from the February low is rather steep and price continues to push higher off these levels.
For now, price above the trend line should be a key determinant to stay Bullish especially if it remains aligned with Bullish Fundamental developments like supply cuts that were mentioned above. Another technical indicator that supports that bullish bias is the recent move above the 100-DMA (46.39/bbl). For the week of October 10, the 100-DMA also aligns with the Weekly S2 Pivot.
Lastly, a bullish Andrew’s Pitchfork has been drawn to replace the bearish Pitchfork that has helped frame price action over the last year. Naturally, the key resistance remains the 2016 high at $51.54 for WTI Crude. Above the 2016 high, the Pitchfork turns attention to 78.6% retracement of the 2015-2016 range at $54.75. If that level is broken in WTI Crude Oil, the 38.2% Fibonacci Retracement of the 2013-2016 range sits at $58.98, which is awfully close to the ~$60/bbl forecast of Saudi’s Energy Minister, Khalid Al-Falih’s forecast after the OPEC accord.
About Brent’s recent outperformance over Crude, Brent Oil has already broken above its June high, which may indicate WTI is not far behind. One reason for Brent’s recent outperformance over WTI may be evidence of Shale exploration and production increasing activity after the late-September OPEC accord to cut production.
WTI Crude hits important trend line and 100 week moving average resistance at 4720/40. There is a good chance we have already seen a high for the day and could turn lower to 4680/80, perhaps as far as good support at 4640/30. Watch for a low for the day, but longs need stops below 4600. On a break lower, look for a buying opportunity at 4560/50.
A break above the September high at 4775 is a buy signal, despite overbought conditions targeting 4820/30 then 4845/50 & 4875/80.
It’s easy to see the relationship. As the average Brent crude price has fallen since 2014, Chinese restocking has surged, jackknifing higher in 2016.
“The latest data released for China show the nation’s implied crude stock building rate accelerating to 1.1 mb/d [million barrels per day] for the month of August,” said Miswin Mahesh and Michael Cohen, commodity analysts at Barclays.
“The stocking rate is higher than the year-to-July rate of 780 kb/d, and the 440 kb/d averaged over June and July. The jump in August is a result of teapot refineries re-stocking, refinery maintenance, completion of storage facilities as well as the low oil price environment.”
“Teapots”, as they are are known, are independent oil refineries operating in the country, and account for around 20% of China’s refining capacity.
On the last factor — cost — Mahesh and Cohen found that the pace of inventory restocking is strongly linked to Brent prices, both from a monthly and yearly perspective.
“Since the price fall in 2014, China’s implied crude stock build has increased significantly. On a monthly basis, it appears that $50/bbl Brent is a key price level, below which implied crude build tends to remain at elevated levels,” they say.
This chart from Barclays plots monthly changes in Chinese crude inventories versus changes in the average Brent price. It’s clear what levels the Chinese are buying at.
And Mahesh and Cohen believe stockpiling will continue as the government strives to meet its 2020 target of 90-100 days of net import cover, something that currently sits at just a third of that level, according to Barclays.
“We see crude oil stocking rates by China averaging at least 400 kb/d over Q4 2016 and 2017, and our analysis suggests that the pace of China’s stocking activity will be linked to the price of oil rather than the completion dates of its Strategic Petroleum Reserve (SPR) sites,” they wrote.
US oil settles at $45.34 a barrel, up $1.29, or 2.39%
Oil prices were up as much as 3 percent on Wednesday after a surprise drop in crude stockpiles reported by the U.S. government, marking a third weekly decline in the closely watched data.
Prices were slightly higher after the Federal Reserve said it would leave interest rates unchanged. The dollar fell after the announcement, making dollar-denominated commodities, such as crude oil, more affordable to holders of other currencies.
The U.S. Energy Information Administration (EIA) said domestic crude inventories fell by 6.2 million barrels for the week ended Sept. 16, versus a 3.4 million-barrel drop forecast by oil market analysts polled by Reuters.
Crude stocks in the world’s largest oil consumer have fallen since this month began. Some 14.5 million barrels were reported drawn for the week ended Sept. 2, the biggest weekly drop in 15 years after a tropical storm that slowed the arrival of oil imports in the U.S. Gulf Coast. In the subsequent week to Sept. 9, there was another decline of 559,000 barrels.
Crude inventories down 6.2M barrels
While the draws have put a bullish face of sorts on oil, they also contrast with surging production from OPEC and other major producers such as Russia, causing a swing in crude prices lately.
“We are still very well supplied for this time of year,” said Tariq Zahir, trader in crude oil spreads at Tyche Capital Advisors in New York.
Some market participants were puzzled by the U.S. crude draw when imports as a whole rose and refinery runs fell.
U.S. crude imports rose last week by 77,000 barrels per day, but the rate dropped sharply in the U.S. Gulf, falling about 500,000 bpd to 2.9 million bpd, close to the record low of 2.5 million bpd hit in the week to Sept. 2 when the storm disrupted supplies.
Refinery crude runs fell 143,000 bpd as utilization rates fell 0.9 percentage point but were still high at 92 percent of total capacity.
U.S. gasoline futures rose 2 percent after data showed stocks of the motor fuel fell 3.2 million barrels nationwide, compared with analysts’ expectations for a 567,000-barrel drop.
That contrasted with record builds in the Gulf Coast and record draws in the East Coast, amid a near two-week outage on a key gasoline line that runs from the refining hub in the south to northeast. The line was to reopen on Wednesday.
“The Colonial pipeline mess is evident in the gasoline data, which showed supplies stranded in the Gulf and drawn down in the East. We will have to see if the trends normalize next week,” said John Kilduff, partner at New York energy hedge fund Again Capital in New York.
OPEC is a toothless tiger: Expert
Adding to the upward price momentum was an oil service workers strike in Norway that could impact output from western Europe’s biggest crude producing region.
Key for the market is next week’s meeting in Algeria between producers from the Organization of the Petroleum Exporting Countries (OPEC) and Russia to discuss measures to rein in oversupply, including an output freeze at current levels, but analysts said they did not expect significant results.
“Even with a freeze — which would still mean OPEC production is at record levels — we will still be in an oversupplied market,” said Matt Stanley, a fuel broker at Freight Investor Services (FIS) in Dubai.
Oil prices initially fell in the previous session on pessimism that OPEC members and other major crude producers will reach an output freeze deal during Sept. 26-28 informal talks in Algeria. Saudi Arabia, Iran, Iraq, Nigeria and Libya, five of OPEC’s largest oil exporters, have all raised or been trying to hike output in recent months even while talking of a freeze.
But at midday, short-covering and fresh buying emerged from traders who feared a rally if OPEC announce a deal in Algeria.
OPEC Secretary-General Mohammed Barkindo said he expected the potential freeze deal between OPEC and other producers to freeze output to last one year, longer than previously thought.
Oil prices fell as much as 3 percent on Tuesday after a series of gloomy predictions on demand growth that suggested the global overhang of unused inventories may persist for longer than anticipated.
The International Energy Agency, which advises oil-consuming countries on their energy policies, said a sharp slowdown in oil demand growth, coupled with ballooning inventories and rising supply, means the market will be oversupplied at least through the first half of 2017.
This contrasts with the agency’s last forecast a month ago for supply and demand to be broadly in balance over the rest of this year and for inventories to fall swiftly.
The IEA’s comments follow a surprisingly bearish outlook from the Organization of the Petroleum Exporting Countries on Monday that also pointed to a larger surplus next year due to new fields in non-member countries and as U.S. shale drillers prove more resilient than expected to cheap crude.
Low oil price not enough to adjust fundamentals: Pro
“It seems the situation has deteriorated strongly in the eyes of OPEC as well as the IEA,” Commerzbank head of commodities strategy Eugen Weinberg said.
“I wouldn’t be surprised to see this price weakness continue for a while right now, because that was not on the cards, in our opinion.”
A stronger dollar also weighed on crude and other commodities denominated in the greenback, making them less affordable to holders of currencies such as the euro. U.S. equity markets fell more than 1 percent, adding to the bearish sentiment.
Upbeat Chinese data on industrial output growth for August failed to lift oil prices as the crude market remained in a profit-taking mode, traders said. China’s industrial output grew the fastest in five months as demand for products from coal to cars rebounded thanks to higher government spending and a year-long credit and property boom.
Speculators in U.S. and Brent crude futures took an axe to their long positions in the latest week, cutting the combined net speculative length in the two contracts by 80 million barrels, according to PVM Oil Associates.
Reducing oil expectations
Analysts expect U.S. government data on Wednesday to show a stockpile build of 4.5 million barrels in crude last week. The American Petroleum Institute, a trade group, will release its own preliminary supply-demand report for last week at 4:30 p.m. (2030 GMT) on Tuesday.
Oil prices rose in the previous session after uncertainty over a potential U.S. Federal Reserve rate hike in September weighed on the dollar.
Even so, expectations of U.S. monetary tightening before the end of the year, along with the bleak demand outlook projected by the IEA, further diminished market optimism that the world’s largest oil producers might agree to freeze output when they meet for talks in Algeria on Sept. 26-28.
“The idea of an oil production freeze makes even less sense if demand falls apart while U.S. monetary stimulus is being removed at the same time,” said David Thompson, executive vice-president at Powerhouse, a commodities-focused brokerage in Washington.