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US oil price plunges toward $50

Market alert: US oil price plunges toward $50 as a perfect storm brews

Workers connect drill bits and drill collars, used to extract natural petroleum, on Endeavor Energy Resources' Big Dog Drilling Rig 22 in the Permian basin outside of Midland, Texas.

Futures Now: Crude oil hits 1-month low   

Oil is on track to break through the key psychological level of $50 a barrel after a ninth straight rise in U.S. crude stockpiles came at exactly the wrong moment, analysts said Wednesday.

The amount of crude oil in U.S. storage rose to another record high on Wednesday, jumping 8.2 million barrels from the previous week, the Energy Information Administration reported. The increase was more than four times what analysts expected.

Weekly figures also showed U.S. oil production continuing to tick up toward 9.1 million barrels a day, the highest level in more than a year. That provided further evidence that rising American output is confounding efforts by the Organization of the Petroleum Exporting Countries, Russia and 10 other exporters to reduce global oil inventories by curbing their own output.

“It’s really been like a kettle boiling for the last few weeks in terms of having traded in a very tight range. There’s been this pressure building from a technical perspective.” -Matt Smith, director of commodity research, ClipperData

The data sent U.S. benchmark West Texas Intermediate crude prices plunging more than 5 percent to a nearly three-month low.

The plunge through a number of lows on Wednesday puts oil on a path to test the December low of $49.95 a barrel, said John Kilduff, founding partner at energy hedge fund Again Capital.

“From there you could accelerate,” he told CNBC, adding that $50 “was the fail-safe.” Kilduff’s downside target, once oil breaks below $50 a barrel, is $42.

For the last three months, oil has traded in a range between $49.61 and $55.24.

According to Kilduff, all the elements are in place for oil to break below its three-month range: lack of cohesion among OPEC members, bearish statements from oil ministers at CERAWeek conference by IHS Markit and subdued refinery activity as operators perform seasonal maintenance in the United States.

Bearish OPEC comments at CERAWeek

On Tuesday, Saudi Oil Minister Khalid al-Falih warned at CERAWeek that the kingdom would only support OPEC’s intervention in markets for a “restricted period of time” and would not “underwrite the investments of others at our own expense and long-term interests.”

Later that evening, oil ministers convened a last-minute press briefing, where they reaffirmed their commitment to the production cut deal.

“The Saudis almost explicitly warned that if we don’t get cooperation or we see cheating we’re not going to be someone’s patsy forever,” said Tom Kloza, global head of energy analysis at Oil Price Information Service.

Saudi Arabia has so far provided the lion’s share of output cuts as OPEC and other producers seek to remove 1.8 million barrels from the market in the first six months of 2016. Iraq, OPEC’s second largest producer, produced above its quota in January.

Saudi energy minister: We have been bearing a significant part of the load of OPEC cut

Saudi energy minister: We have been bearing a significant part of the load of OPEC cut   

Also at CERAWeek on Tuesday, Iraqi Minister of Oil Jabbar Ali Al-Luiebi said Baghdad could increase its output capacity to 5 million barrels a day by the second half of 2017, raising concerns about its commitments to production cuts.

Andy Lipow, president of Lipow Oil Associates, said $50 can now be considered a target. If oil prices break that level, market watchers can expect more talk from oil ministers about extending the OPEC agreement another six months when producers meet in May, he added.

“I think that OPEC is hoping they can wait it out so they don’t have to make a decision in May to continue with production cuts, but they may be forced into that decision given the high inventories here in the U.S.,” he said.

Those inventory builds are likely to continue through the refinery maintenance season, according to Lipow.

Kettle finally boils over

Further fueling the fall to $50 a barrel is the record number of bets traders have recently made on crude rising further, said Matt Smith, director of commodity research at shipment tracking firm ClipperData. As oil prices fall to the bottom of their range, more traders will look to unwind those positions, he explained.

“It’s really been like a kettle boiling for the last few weeks in terms of having traded in a very tight range. There’s been this pressure building form a technical perspective,” he said. “As that happens, as that pressure builds, we tend to pop violently.”

OPEC Secretary General Mohammed Barkindo (R)

OPEC secretary general on production cuts   

Kloza also sees the anniversary of crude oil storage leases playing into the problem.

Many traders took out one-year leases around this time in 2016, when crude prices were near the lows of the downturn, he explained. Now that the oil price curve is flattening — meaning prices for future crude deliveries are declining relative to current costs — traders have little incentive to sign another one-year lease. Instead they’re selling that oil into an oversupplied market.

While the next 30 days provide an environment ripe for a drop below $50 a barrel, Kloza said, he doesn’t see an “apocalyptic move lower.”

“We may break below that range for about 90 days, but in the end I think we’ll be above it come driving season,” he said. “From now through let’s say May, it may be stormy times,” he said.

The Rules Of The Crude Oil Market Have Changed

We gobbled up the CME Group’s recent whitepaper on Crude Oil,  loving all things Oil and Crude Oil futures related; and it is spot on (if not a little self serving) with the new dynamics in the energy sector due to increased supply and the US market’s ability to export that supply.

Remember that everything changed in the crude oil sector when the U.S. officially lifted the export ban on crude in 2015, making WTI Crude Oil (WTI = West Texas Intermediate) more on par with Brent Crude Oil.  Before this period, Brent was used as the international standard, simply because WTI crude (which is US crude oil) wasn’t able to be exported (much less moved out of Cushing, OK very easily); while Brent was shipped around the world without hesitation.  The CME’s in-depth article looks at just how much of an impact lifting the ban has had on the production, distribution, and price fluctuation for the crude oil business. Take a look at the price difference after the US lifted its ban on exporting crude oil, via the CME Group.

Oil Market

(Disclaimer: Past performance is not necessarily indicative of future results)

Crude Oil

You can look at that chart and see the spread roughly at the same level now as when the ban was lifted. But a lot of that has to be buying the rumor, selling the fact amongst traders. The export ban surely didn’t happen overnight, it was months and years in the making. The CME Group suggests this ban lift came from a sharp rise in oil production, going from producing 5.1 million barrels a day in January 2009, to 8.8 million in October 2016. At one point, it was at its highest in March of 2016, producing 9.9 Million b/d. That’s quite a jump, and would definitely help explain why supply is one of the reasons prices have pushed lower over the past two years. The argument is sound… we’re drowning in excess supply of this stuff, pushing down prices, hurting US companies and jobs which has let us ship it out of the country where it is wanted.

If that big increase in supply was the impetus, what happens when supply increases yet again? The CME shows us that according to the EIA, we should expect production to grow by at least another 3 million more barrels a day over the next decade.

Oil Market

The interesting part of this graphic is the breakdown of the different types of ‘US Oil’, with the gray representing the traditional Texas, California, etc. oil rigs, the blue the newer traditional Gulf Of Mexico production – and all those other colors the shale and fracking revolution. You can see from CME’s graph that the major production in oil isn’t coming from conventional oil, but all the alternatives out there like “Tight” produced from shale, sandstone and limestone formations.

Wherever its coming from – this growth in US production, combined with the lift on the ban, has re-energized the debate over which oil contract is the standard in crude oil contracts. Here’s the CME:

 

The WTI-Brent spread has become a true indicator of value for the U.S. crude exporters. With the spread trading between $1 and $2 per barrel discount to Brent, traders say that increased volumes of WTI linked crude oils may flow to countries outside of the US and Canada. Part of this is due to the relatively low cost of freight with traders able to benefit from the ability to offer a US bound cargo and a now a US origin crude oil export cargo as a single transaction to a ship owner. Without US crude oil exports being permissible, ship owners were previously only able to pick up US bound cargoes and struggled to find any return cargoes leaving their vessels out of place for subsequent voyages. Shipowners now have the choice of a back-haul crude oil cargo or a refined product cargo as the US exports both. This tended to result in higher freight costs to a charterer due to the lack of economies of scale (for the ship owner).

Further, the recent expansion of the Panama Canal allows for enhanced shipping alternatives for cargoes to transit from the U.S. Gulf to the Far East. The significant discounts for WTI compared to Brent from the past are unlikely to re-appear as any mispricing would be quickly re-aligned through a rise in U.S. crude exports, which was not the case in the past when U.S. crude remained non-exportable.

Cushing, Oklahoma and Storage Issues

If you’re familiar at all with the physical side of oil, you know that most of it ends up in the Oklahoma town of Cushing. It’s where most of the Shale and Texas Oil is stored until shipped out, but the recent uptick and changing dynamics has spurred changed on that front, via CME Group.

The U.S Gulf Coast comprises approximately 55% of the U.S. crude oil storage capacity, while Cushing comprises 13%. The infrastructure investment in the U.S. Gulf Coast has transformed WTI into a waterborne crude, with extensive export capacity. All in all, the Houston market has become export- focused, with a terminal network with storage capacity of 65 million barrels and an additional 20 million barrels of storage capacity projected to come into service in 2017.

Right on cue,  the CME Group has created a Crude Oil Storage contract. Each month, 7,000 contracts are sold auction still – which gives the buyers the right to store 1,000 barrels of oil off the gulf coast. The Wall Street Journal describes what happens next.

Once the contracts are sold through the auction, they can be bought and sold freely. At the end of the month, anyone holding a contract can use the storage space, which will hold the oil in either an above-ground storage tank or an underground cavern.

Of course, this is mainly for the players in the business….

So, who will use the oil-storage futures?

Producers, transportation companies and refiners all have exposure to commercial storage rates. A storage futures contract could allow those parties to lock in those costs ahead of time or trade them for profit.

Foreign companies might be interested too. Waterborne deliveries can be delivered to the Clovelly hub, along with oil from Texas and offshore Gulf of Mexico production.

Put this together and Cushing is no longer the crude oil storage capital is once was. Take a look at the change is U.S. working crude oil storage capacity.

Oil Market

What Does This All Mean?

Well, for one, it’s the CME tooting their own horn here, a bit. They would like nothing more than for the majority of Oil hedging and trading to be done on their own WTI Crude Oil Futures contract, versus the ICE’s competing Brent Crude Oil Futures Contract. What better way to convince you to trade it than point out how its supply is growing impressively both in sheer numbers, and in number of places producers can put it. With a more diverse storage geography in the US (plus the ban on exports being lifted), WTI can be sold to

Crude Oil Prices Brace for OPEC News

DAILY FX

Crude Oil Prices Brace for OPEC News, Gold Prices May Bounce

Monday, Jan 9, 2017 6:36 am +02:00

Fundamental analysis, economic and market themes


Talking Points:

  • Crude oil prices mark time, bracing for OPEC commentary
  • Gold prices snap 3-day win streak on US wage growth data
  • Cautious Fed-speak may cool bets on steep rate hike cycle

Crude oil prices are marking time in familiar territory as the spotlight turns back to OPEC and the implementation of its output reduction scheme. Cartel members will gather in Abu Dhabi for a variety of conferences throughout the week. Meanwhile, the group’s Secretary General Mohammad Barkindo is embarking on a three-day trip to Kuwait, which chairs the OPEC’s committee monitoring production cuts. This makes for significant headline risk and investors may be leery of taking big directional bets in the interim.

Gold prices snapped a three-day winning streak as after the December’s US employment data showed that on- wage growth jumped to a cyclical high of 2.9 percent. This suggested that the economy is running hotter than expected even before a would-be inflation boost form fiscal policies advocated by President-elect Trump. Not surprisingly, this reenergized bets on a steeper Fed rate cycle, sending US yields upward alongside the US Dollar and undermining the appeal of anti-fiat and non-interest-bearing assets.

 

FOMC policy speculation remains in focus from here as the markets parse scheduled comments from Eric Rosengren and Dennis Lockhart, Presidents of the Fed’s Boston and Atlanta branches respectively. A repeat of the cautious tone on offer in minutes from December’s meeting of the rate-setting committee may pour a bit of cold water on tightening bets, offering the yellow metal a bit of a lifeline.

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GOLD TECHNICAL ANALYSISGold prices paused to consolidate gains but maintained their foothold above 1166.51, the 23.6% Fibonacci retracement. From here, a daily close above resistance in the 1193.55-99.80 area (38.2% level, May 30 low) exposes the 50% Fib at 1215.40. Alternatively, a break back below 1166.51 targets the 14.6% Fib at 1149.85.

Crude Oil Prices Brace for OPEC News, Gold Prices May Bounce

CRUDE OIL TECHNICAL ANALYSISCrude oil prices continue to consolidate in familiar territory. A daily close above the 14% Fibonacci expansionat 54.03 targets the 44.19-21 area (23.6% level, January 3 high). Alternatively, a reversal back below resistance-turned-support at 51.64 opens the door for a test of the 38.2% Fib retracementat 50.25.

Crude Oil Prices Brace for OPEC News, Gold Prices May Bounce

— Written by Ilya Spivak, Currency Strategist for DailyFX.com

Crude Oil Forecast

WTI Crude Oil and Natural Gas Forecast

By: DailyForex.com

WTI Crude Oil

The WTI Crude Oil market fell during the day on Friday, as we continue to run out of steam. However, it’s the end of the year so it’s difficult to imagine that there would’ve been a lot of buying pressure on such and illiquid day, and I believe that the $55 level above will be resistive going forward. I think that pullbacks will be buying opportunities, and a break above the $55 level since this market looking for $60. However, inventory numbers in the United States are on the rise, and of course the rig count keeps climbing as well, almost ensuring that the oversupply will continue going forward. With this, I’m waiting for an exhaustive candle to start selling but in the meantime, I recognize the short-term traders will probably favor the upside.

Crude oil

Natural Gas

The natural gas markets initially tried to rally and Friday but then turned around to crash through the $3.75 level. With the lack of liquidity for the session on Friday, I find it very difficult to read too much into this trade. A break down below the $3.65 level should send this market to the $3.50 level going forward. Colder temperatures coming in the month of January will probably drive up the price in the short-term, but I think that there is a lot of noise between here and the $4.00 level, so given enough time the sellers will return. I think this will be a very volatile back-and-forth type of market over the next several weeks, but I have to believe that there is still more than enough bullish pressure underneath the keep this market going higher in the short-term.

Ultimately, I think that we turned back around and crash much lower, as the oversupply will continue to haunt the market, but currently traders seem to be focusing on the next few weeks more than anything else.

Natural gas

WTI Crude Oil: Important Trend Line At 4720/40

By Jason SenCommoditiesSep 29, 2016 01:50AM ET

www.investing.com/analysis/wti-crude-oil-daily-forecast—29-september-2016-200156162
WTI Crude Oil: Important Trend Line At 4720/40

By Jason Sen   |  Sep 29, 2016 01:50AM ET

WTI Crude Weekly Chart

WTI Crude Weekly Chart

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.