FxGrow Fundamental Analysis – 08th Feb, 2017
By FxGrow Investment Research Desk
Oil Price Slips on Hints of Imposing Crude Imports Taxes
The war continues between the two parties, USA and OPEC. Taking into consideration USA is the largest economy in the world, with heavy dependence on Crude oil for industrial and civil sectors, it is of USA’s best interest to keep lower prices.
On the other hand we have OPEC, being dependent on oil production as the main source for economy with recent efforts to curb oil production and additional glut in the market with hopes of higher traded oil levels.
OPEC recent meeting in Vienna was fruitful and resulted in an epic so long waited deal to cut 1.8M bpd. Compliance so far was estimated at 85% and 100% is expected to kick by beginning of June 2017 which lifted oil levels from $36 at 2016 opening, extended additional gains at Jan 2017, peeking above $55 and a steady increase was expected through 2017 especially beginning of June.
Yesterday, oil prices took a dip and extended bearish momentum resulted in -3.77% loss (-$2.1) on expectations that Mr. Trump is due to impose a controversial import tax for crude oil products. Now the WTI/Brent trade is back in fashion on expectations that the spread will again become highly changeable due to the possibility that under President Donald Trump the United States will slap an effective 20 percent tax on imports, including oil according to Reuters. Analysts mentioned that such move would almost certainly break World Trade Organization rules.
Uncertainty over Trump’s tax policy poses issues for the oil industry itself. Analysts at Goldman Sachs - one of the most active banks in physical commodity trading quoted "“We recommend shifting hedges to Brent as the basis risk is smaller than the policy risks … In turn, consumers and refiners should consider hedging through WTI instead of Brent until the policy uncertainty is lifted,” the bank said.
Also added, “Should the (tax) be implemented, we recommend that US producers aggressively take advantage of the 25-percent relative appreciation of WTI prices.”
Analysts assigned only a 20 percent probability to the tax being implemented and 24 reports on futures prices implied only a 9 percent chance. Also, expectations of a surge in outright WTI prices would be short lived, as the oil price rallies would increase additional efforts for US producers to increase their output. With the chance that OPEC members would resume production, chances of oil surplus in 2018 is now into consideration.
A senior executive at a major trading house added that shale producers have been conspicuous by their absence from the hedging market in the past few weeks, precisely because of their reservations over the border tax. “Basically shale firms don’t know what to do. You would look stupid if you hedge and the WTI price rally afterwards,” he said.
In Conclusion, Trump is controversial and recent speeches and announcements have proven so. Add to that, low expectations of imposing tax law on crude oil imports with possibility of creating a problem for World Trade Organization rules, Trump’s plan falls into narrow skepticism. OPEC deal has more solid grounds and it’s already being implemented with positive outcomes. Hence, OPEC plan or deal has a heavier impact on the market and expectations of crude oil levels to reverse to bullish momentum are more likely but look forward for Trump’s unpredictable moves.
Remark : Look forward for US crude oil inventories today scheduled today at 3:30 PM GMT which will shake oil levels on technical levels .
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