We have a seemingly curious situation regarding the outlook for oil prices over the near term!
Supporting the market, we have OPEC and the 11 other non-OPEC producer countries continuing their reduced production levels in order to stabilize prices - and will possibly be extending these cuts to the end of the year. In addition, we also have a number of analysts predicting that increasing demand will remove the current global oil supply glut and support prices around the $60 a barrel level. But if prices do start to rise significantly then that will immediately place temptation in the way of these OPEC and NOPEC countries to start increasing their production to avoid losing market share and to increase badly needed revenues.
But we also have US producers increasing production and drill rigs and thus countering to some extent the OPEC reductions and also reducing US oil imports from e.g. Saudi Arabia. However, whilst the US administration is committed to energy policies that will maintain lower prices and reduce oil imports, the US oil industry itself will not wish to see prices falling too low and damaging their own revenues.
Therefore, on balance, one could start to see evidence that prices may well be near their lows for the time being as we approach the summer increase in demand, and maybe see a gradual increase towards the year-end.
I was therefore curiously surprised to read an article this weekend reporting that Russia has now planned its federal spending budget for 2017-2019 based on an oil price of $40 a barrel continuing throughout this 2-year period........
My charts finished last week still with a negative trend on the daily - requiring a price rise now through 49.45 to cancel it (Turbo's 5-day method). But there was a clearly neutral/positive end-week close on the one hour and shorter term charts.
There is also an interesting situation on the long-term daily chart going back to the middle of last year:
My own thoughts are that we could possibly now be entering a consolidation period, which will see strong oscillations between broad extremes from now until the OPEC decision in May concerning extending their production cuts.
The question is which goes first, the 5-day 49.45 (high from 21.3, which if not touched on Monday, will drop anyway on Tuesday to 48.25,the high from 23.3.) - or that daily support line, which could lead to a substantial reactive fall.........
Going into the new week I am still too wary to buy until and unless the daily turns upwards and so I continue to watch the 1H chart for a downturn.....................................
Manxx, the JMMC met today in Kuwait - their communique could affect price tomorrow, worth being aware of it although maybe the market will just shrug it off.
Thanks, yes, Peterma, I have been watching that. So far there has only been talk of them analysing the degree of compliance so far from partners, especially the non-OPECs like Russia. I somehow doubt that they will end by saying anything that could be construed as negative for prices given that their interest is entirely the opposite - but then there is always the contrarian view - if they say positive things that dont have market credibility then it is negative!
It still seems that the problem is the increase in US production cancelling out the deliberate shortfall from OPEC/NOPEC. They have said that OPEC’s compliance rate was 106% in February and 64% for the non-OPEC nations including Russia - but that is not having any impact so far on prices and it all feels very heavy...........but there are still plenty of long-term interests anticipating an eventual rise in prices and are buying. But on the other hand, I read that there are very high long positions at present and if these start to liquidate then we could easily see a fall towards $40 in a very short time. That's why I am still only looking for sell opportunities ...and thankfully can rely on charts (and blame them!) instead of having to form a fundamental "smart-view"!
Early prices down from Friday's close in Far East. Overnight hourly chart at this point lining up with the negative daily.
Everyone seems to be currently concentrating on the level of inventories in the US and so this week's key data releases will be the API crude stocks on Tues and the EIA weekly on Weds as well as the rigs count on Fri.
There is undoubtedly a significant build in US crude stocks but, at the same time, there are some mitigating circumstances that may well start to change that situation in the coming weeks:
1 - recent stock increases include arrivals from Middle East from before the start of the reduction agreement and will now start to tails off.
2 - seasonal factors lead to temporary stock increases at this time of year as US refineries schedule maintenance work prior to production starts for the summer season.
Most commentaries seems to point to a broad range of $60 -$40 a barrel in the next few years.
As previously mentioned, as prices trend lower it begins to affect the profitability of production sites and eventually leads to plant shutdowns. With that in mind, I found an interesting graphic of the production cost levels for various countries:
When considering trading with multiple timeframes in Crude Oil it seems that the normal concept of, say, Daily/4H or 4H/1H changes to a long-term TF of 2-5 years and a short-term TF of 2-5 mins!
The changes in the actual fundamentals of supply can take years before new production developments actually come on stream, and even longer if one includes the exploration stage. And the demand fundamentals can also take years as the economic cycles in various countries and regions change.
On the other hand, the speculative and hedging interests in the oil market are absolutely huge and from many sources. This means the instruments and the liquidity and the size and the motivation are all present and can create reactions to new insights and situation changes within hours and minutes.........stay aware!
Well that was a nice "early bird" start to a new week! I never usually trade on Mon mornings but that cross on the 1H was just too tempting.... and I closed it after writing the above post.........now for that breakfast coffee!
I probably closed it far too early but it was approaching previous lows and, afterall, it is early.........
Hi, Peterma - thanks for that article! Here are some highlights from it that I thought were interesting and currently relevant.
On the time lag in long-term fundamental changes:
"Taking a longer-term perspective, the oil price drop can be explained by previous large investments and technological innovations that caused oil production to surge at a time of weakening growth. Technological breakthroughs sparked the shale oil revolution in the United States, and several years of high oil prices, against a backdrop of strong growth in emerging market economies, encouraged large-scale investment in oil. Owing to a considerable lag between investment and production, the resulting supply entered the market when demand for oil was no longer increasing."
On the impact of greater cost efficiency on increasing production in US shale oil:
The arrival of US shale oil and unconventional oil exploration more generally is a structural supply-side shift which might cause oil prices to stay lower for longer.
On current bearish v. bullish factors:
"The downside risks to oil prices are:
- on the supply side related to further increases in global oil production owing to a stronger than expected return of Iranian oil and the continued resilience of non-OPEC production, in particular US shale oil.
- on the demand side, a stronger than expected slowdown in emerging economies might affect oil demand negatively.
The main upside risks are:
- stronger than expected cutbacks in oil production owing to geopolitical tensions
- and larger supply fall-backs if oil prices remain persistently low."
On balance I would still consider the downside factors as more dominant, realistic and current.........
Digesting the thread and watching the charts. Manxx, you mentioned your chart indicators as "MA's, some as ribbons, and a MACD with settings 50,60,4 to give a longer term signal." I was looking to replicate what you have as a starting point (if you didn't mind), but my experience with indicators is very limited. Just MA's mainly.
The fundamentals are interesting - reading the summary above and being a total newbie myself (on oil), I'd be hard pressed to make a prediction. I read somewhere that fuel oil stock building started in April for the following winter and that consumer demand increased in the Summer as people used their cars more for travelling. Quite what effect that may have on pricing (if any), and the bigger picture I don't know. That's probably the sum total of my "knowledge", apart from what you've provided here.