I can’t really get the caution of hedge funds yet, Saudi Arabia does its best to drag prices higher to make the ends meet. According to this article the kingdom is really determined to push prices higher Austerity isn’t about Saudi Arabia - Broker Arena
I think there are two separate issues here, one is speculative and the other is protective.
Yes, Saudi Arabia is doing its best to raise prices, along with other producer countries, for a number of reasons. Recent price levels have been below the breakeven level for many producers and have seriously affected their national budgets, even pushing them into deficits.
Saudi Arabia is also concerned that oil prices go higher because of their forthcoming IPO of Aramco oil company. This is a huge deal and even though only 5% of the company is being sold the overall value of this company is in trillions of USD. And its valuation for the purposes of the IPO is highly dependent on the price of oil at the time and in the future.
But oil price is ultimately the balance of supply and demand and even Saudi Arabia cannot alone simply “talk” the price up so there is always a risk of prices remaining low or even falling.
That brings us to the other issue, price protection.
The oil producer companies run huge exposures if they rely on selling their oil at market prices and will often use various derivitives to hedge or lock in some of their future income against future production.
Oil commodity swaps are one way of doing this whereby the producer pays a variable amount based on market prices to an institution in return for a fixed payment. Simply put, the producer company passes its future market-based income from sales straight through to the institution and receives in return the pre-agreed fixed income from the institution.
This means the institution has the opposite risk in that if future prices fall then their variable income from the producer company will be less than the fixed payments they are making. In order to hedge this risk they can match their variable costs with short positions in futures, etc. So if oil prices do fall then they gain on their hedge positions.
This may be a very simplified scenario, but the point is that not all positions in oil, or any other market, are entirely speculative. A large quantity of positions in currencies and commodities are to secure the value of future cash flows upon which the viability of their business depends.
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Extremely valuable input, thank you.
Could you recommend some books where can I read about it more? Like commodity pricing or well-known boom&bust cycles which are commodity markets are subject to…
Unfortunately, I cannot do that. I am not any kind of specialist in commodities. I just have a passion for oil! 
My background is from banking where I worked in foreign exchange/short term funding and commercial loans sections and so my training is from company training courses and work experience rather than self-teaching from books.
So we just had the EIA inventories release which gave a quick sell-off due to being a smaller drawdown than expected at 2.237 mill barrels compared with the expected 2.8 mill barrels. I have not yet looked at the oil product figures in the release. (edit correction: the figures release were actually an increase and not a drawdown, thus causing the initial sell-off)
These are not hugely divergent figures and not likely to completely negate the current bull trend and so I bought back in at 56.50 and waiting to see if there is a return to the rising prices…but I will be out again quick if this does not hold…
[edit]…actually, we have very quickly got back to 57.00 so I have closed, taken the money, and will wait to see how this settles down first and for a positive signal on the 1Hour chart before re-entering…
[edit again!] Price broke the daily pivot at 57.12 for the first time today and re-entered long.
[edit yet again!!] Rapidly changing day today. Out with just a further 20 pip gain. Huh huh! time to SOH’s and see where we close today! Great day! Great pips! Great fun! Wow Oil! <3
Update on Russia’s crude oil production
Excerpts from the EIA report:
Russia was the world’s largest producer of crude oil (after Saudi Arabia and the United States) in 2016, and the third-largest producer of petroleum. It’s economy is highly dependent on its hydrocarbons, and oil and natural gas revenues account for more than one-third of the federal budget revenues. Russia’s economic growth is driven by energy exports and oil and natural gas revenues accounted for 36% of Russia’s federal budget revenues in 2016.
Russia and Europe are interdependent in terms of energy. Europe is dependent on Russia as a source of supply for both oil and natural gas. More than one-third of crude oil imports to European countries in the Organization for Economic Cooperation and Development (OECD) in 2016 came from Russia. More than 70% of natural gas imports to those countries also came from Russia in 2016.
Russia is dependent on Europe as a market for its oil and natural gas and the revenues those exports generate. In 2016, nearly 60% of Russia’s crude oil exports and more than 75% of Russia’s natural gas exports went to OECD Europe.
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Yesterday was a bit crazy as oil often can be. A great day for day traders but a nothing day for long term traders. The EIA release gave substance to everyone whether bulls or bears and the market behaved just like that: first down, then up, then way up, then way down… to finish lower on the day.
Crude Oil inventories increased but gasoline decreased, US production increased to new highs and so did US oil exports. When you produce oil you can do three things: you can store it or you can use it or you can export it. These were three quite mixed events in this release.
So we are back in the same position where we have a bull trend that right now is not going anywhere- yet:
A bit like this:
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What are the possible reasons their tight relations can break? I mean is it alternative energy projects, some other suppliers for Europe, for example US?
Why can’t Europe import NLG from other countries and put Russia in a great hardship? I mean is the measure of their interdependence is EQUAL for both?
Interesting questions, @Ontario.
My first response is would why we even want to put great hardship on Russia?
Of course, in recent times we have seen a big change in global relations with Russia as a result of the Crimea situation, which has led to the imposition of various types of sanctions against Russia. And this has clearly created a worldwide backlash with countries everywhere increasing their military and defence expenditure and carrying out military excercises either unilaterally or jointly with other defense agreement partners such as NATO.
But prior to that there had been a long period following the collapse of the USSR and the communist world, where we witnessed growing trust and mutual developments between Russia and the other ex USSR countries and Europe and the US. During this period the emphasis was on mutual cooperation and development rather than the mistrust and sabre rattling that we are seeing at the moment.
So the question is whether Russia is a permanent threat which has to be kept under control or are the current uncertainties only a relatively termporary problem.
This leads to the second point. Whilst sanctions are an effective way of applying pressure to another entity, they are not necessarily intended to remain long term. But oil and gas distribution is largely via pipelines crossing various national borders and its infrastructure is not something that can be changed very easily or quickly and only at great expense. Therefore it is not a very satisfactory form of sanctions implementation.
Besides, oil and gas are mutually beneficial and cutting supplies is akin to shooting oneself in the foot.
However, a third consideration is indeed the issue of energy dependence and in this area the EU has diversified its position. I believe that very approximately a third of EU oil comes from the middle east and some 15% from Norway as well as from other Asian and Caucasus countries in addition to Russia itself. Supplies of gas, oil and electricity are all diversified and continue diversifying.
I am sure you are right that alternative energy sources will also gradually remove some of these interdependences. EV’s in particular will reduce substantially requirements for gasoline and distillates like diesel and solar power is becoming more efficient and noticeably cheaper to install.
It is also worth remembering that there has been a block on US oil exports since, I believe, the Arab-Israeli war back in the early seventies - this ban has only been lifted in recent years and we are only recently starting to see significant levels being reached in US export figures. This may well become a new factor in distribution in the near term.
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The point I asked you the questions is to understand to what extent imposed sanctions can harm Russian economy?
Do they have postponed effect on Russian financial markets, ruble or the Russian economy is just extremely resilient that secured stability with POOR economy diversification (this may sound a bit controversial, but any sanctions imposed from US can not target the pipeline as it is like creating problems to its ally, Europe). I think you got me, Russia is like very feeble person with very strong and healthy heart that keeps it alive :).
Russian stocks and stocks look extremely lucrative when in times of recent turmoil their larges commercial bank sberbank has been steadily rising …
Hi @ontario!
Well, you are exploring areas here that even using both of my remaining brain cells is going beyond the reach of poor Simple_Simon! 
Russia has been the target of ongoing sanctions since 2014 and the additional sanctions added only recently concerning, amongst other things, interference in the US elections.
Without doubt these sanctions are having an impact but it is arguable that the effect of weak oil prices due to the global oil glut are actually affecting Russia’s economy even more than the sanctions.
One of the problems with assessing Russia is that it is still not as transparent as most western countries nor are its leaders so accountable to parliament or local politics or pressure groups.
These means that Russia, like China and many countries in Africa (at least in my opinion) and even North Korea are able to ignore the poverty and poor infrastructure in their vast rural areas and concentrate their resources on selected areas such as central government, certain industries, military assets, banking and so on.
In addition, corruption is still a major force in many parts of the globe which makes it very difficult to assess whether sanctions are really biting - in the same way as it is so difficult to assess the other end of the spectrum i.e. the effectiveness of targetted aid packages, which are often huge sums of money.
But, you know, these issues, although extremely important and deeply absorbing, are moving quite a long way off from my attempts to earn a few pips off the Crude Oil market!! 
You are raising issues which are relevant to forex and economies in general and on a global scale and this would certainly merit its own thread. If you set up a thread for it I think you may get a wider audience than this on thread (which is very much a side topic that does not interest many posters on BP) and certainly a more intelligent and knowledgeable input than I can offer!
Of course, you are very welcome to continue here and I will try to contribute as much as I am able.
Well there has not been a lot to say about the oil markets this week except that the bull trend going nowhere is continuing to do just that - go nowhere.
This 4H chart shows that we are still in positive territory above the daily green band but, if we ignore the candle wicks, the range has been a mere 60 pips nearly all week.
It is almost as if, although there is no real reason to sell oil, no one is too convinced that there is much room for movement on the upside either!
It has been a day trader’s market all week and anything from 10-50 pips has been not only reasonably achievable but also a good result given the overall (lack of) movement on the week since the close on Monday at 57.22 (see yellow box):
.
Fundamentals:
We have seen crude oil prices recently reaching levels that have not been seen for more than two years. And markets are generally more bullish than they have been for a long time.
However, prices stalled at these levels during most of last week without any further follow through. Any spikes upwards seemed to run into selling from whatever causes and repeatedly dropped back again to around the 57.00 level (WTI).
On the other hand, Friday afternoon saw the Baker Hughes oil rig count release confirming an increase in the number of rigs, which would normally have produced a reasonable sell-off. But after an initial downwards reaction, the market stopped dead and slowly drifted back up into the close for the weekend.
Markets have been rising on the back of diminishing (US) inventories, expectancy that the OPEC/NOPEC production reductions will be extended, signs of a slowdown in U.S. shale output, and the recent turmoil in the Middle East.
The general feeling is that although these bullish factors have not changed, is there actually any reason for prices to rise any higher because of them. This suggests a possible vulnerability here since if current positions are heavily long then any hint of a sell-off could start the usual herd instinct into a healthy retracement.
But it still feels that even a retracement will only offer buying opportunities. US output and exports are still high, output disruptions in other countries such as Libya, Nigeria and Venezuela, as well as the Middle East tensions, are all factors still on the table and OPEC (in particular Saudi Arabia) are still working to reduce stockpiles globally and push prices higher.
Technicals:
The daily chart shows the steady level of prices during most of last week. The trendlines are steeply up and could easily see a corrective drop to lower levels before finding a solid base.
The 4-hour also shows prices still comfortably above the daily green band.
All in all, next week could be quite volatile in either or, probably, both directions. The week’s data releases on inventory levels will be closely analysed…
As expected, yesterday’s trading only reflected some vulnerability on the downside, with some dips into the lower regions of recent price movements. But the irrelevance of these dips is demonstrated by their inability to even move very far from the previous day’s daily pivot level.
We saw one significant spike down to 56.28 (WTI) which quickly reversed back up to the prevailing range. There have been increases in estimates for US oil production sites from both the EIA and OPEC but this has not dampened the underlying support for oil prices at this level.
But the other side of the coin shows the prospect of hedging interests possibly selling into any rallies from here.
The first of this week’s oil inventories data is released later today by the API, which is expecting a further draw of about 1.5 mill barrels on the week. It seems that this release is not considered so accurate as the similar EIA release which comes tomorrow, but it will no doubt create some action anyway.
The 4-hour chart reflects this sogginess in prices over the last few days, but is still in positive territory sitting above the daily green band. The MAs are forming a nice compression and I am waiting for the breakout from this before entering:
Since even the EURUSD is not offering more than a few pips movements at the moment, I think it is time to go for a long walk…
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The downward drift has continued throughout the day ahead of the API release, which is still some 6 hours away. Yesterday’s close was at 56.71 and we are now approaching 56.00. (Just as I posted this, the market just dropped another 50 pips to 55.50! The downside vulnerability is turning into a good correction!!)).
Maybe the 1 hour chart shows well this downward drift over the past two days… It also shows how flat the market has been since early last week…!
In the meantime, I came across this chart which I thought shows well the relative size, in terms of USD revenues, of oil exports from the main exporter countries for 2016. (Note: the chart is not about oil reserves or oil production, it is purely oil exports.) .
The size of the various countries has been increased or decreased according to the relative size of their exports:
The top 10 oil exporting countries in 2016, ranked by earnings and their percentage of the world market, were:
So yesterday finally saw the oil markets break down and remove over $2 from the recent price highs.
Although the API release did surprise the market with a build of 6.513 million barrels compared with an expected draw of 1.5 mill barrels, the market had already moved downwards significantly earlier in the day, primarily, it seems, as a result of the Paris- based International Energy Agency’s latest Oil Market Report.
In this report, it downgraded its oil demand forecast for both 2017 (by 50,000 bpd) and for 2018 (by 190,000 bpd). These figures have a significant impact on expectations concerning reductions in the global oil surplus that OPEC is trying to bring back to balance.
There have been a number of updated yearly and monthly “outlook” type releases in recent days by OPEC, EIA, IEA and API all adjusting their mid- to long-term projections concerning oil supply and demand and it is difficult to decide which factors are really the ones affecting prices now, especially as some of these reports are actually contradictory about the future (no surprises there!). But, fortunately, TA tells us what the majority is doing without having to know why!
But what is unfortunate is that there is often significant discrepancy betweeen the Tuesday API releases and the Wednesday EIA releases and so it is very difficult to decide what may happen today. I guess there may be some early sentiment type follow-through on the downside early in the trading day but I think the market may well wait for further clues from the EIA report on oil inventories, which is due today at 10:30 a.m. EDT.
Technically, in the longer term, I see the daily still being positive and yesterday’s move only corrected some over-enthusiasm on the upside and price has only retrenched within the up channel - and there is still room to drop even further towards the bottom of the up-channel around 53.00 without technically breaking the current long term uptrend.
But, in the mid/short term, both the 4H and 1H had already turned negative even before yesterday’s down move got going due to a prior week of soggy price action - and remain, of course, negative after yesterday’s move.
Daily:
4-hour with superimposed daily band (green):
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Well here we are just a few minutes away from the EIA oil inventories release.
Hasn’t exactly been the most volatile of days so far since the API release yesterday!..
So the EIA also released inventory data that diverged from the “experts’” predictions (like the API yesterday), not just by the amount but also with the direction with a build instead of a drawdown in crude stockpiles.
Perhaps the most significant point is that the market has failed to take out yesterday’s low in spite of potentially bearish data from both sources, the API and EIA.
Perhaps the strangest thing is whether the market is reacting to the data or not reacting to it because of the fact that the data cannot be trusted as reliable!
We are currently stuck in “no-mans-land” between the daily pivot and yesterday’s close in spite of market sensitive data that deviated substantially from expectations!
I looked for follow-through on yesterday’s API huge deviation in inventory data, but got nowhere and scraped out with a pathetic 14 pip profit on the day so far (mind you, one has to remember that both trades are net of the 5-pip broker spread on oil CFDs.) but if the market doesn’t move then there is nothing more to be gained!
There will no doubt be a move later on today and I suspect that it might well be upwards - based on the old, old adage that if the market does not do down on negative news then it is going up! - and why has it not already dived several hours after the release!
So unless yesterday’s low is taken out then I am looking for a return to bullish sentiment…but not until the hourly chart looks a bit more positive than this:
And this lack of bearish movement also in spite of widespread news about the US coming to dominate global oil markets with immense gains in production - news that even appeared on our domestic TV news bulletins!!!
IEA: U.S. will dominate oil and gas markets. In the IEA’s latest report, the agency says that the U.S. shale boom is far from over, and in fact, by 2025, the increase in supply will equal what Saudi Arabia achieved at the height of its oil boom. Similarly, the expansion of U.S. natural gas supply will exceed what the Soviet Union achieved. “The United States will be the undisputed leader of global oil and gas markets for decades to come,” IEA Executive Director Fatih Birol said in an interview with Bloomberg television. “There’s big growth coming from shale oil, and as such there’ll be a big difference between the U.S. and other producers.”
But time to sit and wait until we break out of this neutral area…
I wonder what does rising US stockpile means for fundamental picture of the market. I know its bearish for oil but how exactly it affects market? I would really appreciate your response on this question.
That is a very good question, @Ontario, and there is no simple, straightforward answer to it.
To begin with, we tend to focus on US inventories as a guide to what is happening globally regarding oil supply and storage. But it is only a part of the entire picture, which even includes for example, off-shore storage on tankers.
Also, we tend to focus primarily on crude oil stocks but refined oil products such as gasoline, diesel and aviation fuels are also a big part of the overall picture.
In addition, US oil stock levels are nowadays also affected by exports as well as domestic consumption, even though the US is a big importer of oil. There are different grades of crude and the US will still import heavy grades whilst it is exporting light grades.
But overall, oil is a commodity like most others and its price is affected by changes in both supply and demand and is always driving towards a balance point between these two opposing forces.
All the various producer countries/companies are fighting for market share and profit and if there is a surplus of oil on the market then this will drive prices downwards. Equally, an increase in demand will pull prices higher.
But oil has an added factor in that it can also be stored. If prices are considered to be too low then one can store and sell later.
Also oil is almost universally priced in USD even between producers and consumers with other domestic currencies and so changes in the value of the US dollar can also affect timing and size of transactions.
But at the present time, the major concern is that the current level of oil prices are insufficient to cover the breakeven costs of many producers and only produce a net revenue that is insufficient to cover the budget deficits of many oil-dependent countries. But while oil inventories are globally still very high it is difficult to raise prices higher.
OPEC is trying to reduce this global overload by an agreed cut in production of 1.2mill b/d together with a group of non-OPEC countries (inlc Russia) with a further cut of 0.6 mill b/d and that seems to be making some progress even though it is substantially offset by the increasing levels of output in US shale oil (which is also cheaper to produce).
Saudi Arabia wants to see as high a price level as possible in the run up to its partial sale of its state-owned Aramco oil company. Even though it is only 5% that is being sold through an IPO, it is still a huge deal worth billions to Saudi Arabia with which SA will finance its intended gradual diversification away from oil revenues.
The one thing which is certain is that oil will remain a significant energy source for decades to come and its price, and the price of oil derivitives, will form a major component of the cost structure of countries, companies, societies and individuals for many years ahead. What is spent on energy cannot be spent on something else and thus its impact filters through to the consumers and their (in)ability to boost economic activity in general.
But there again, oil is a huge industry in itself, providing business, jobs and incomes in a whole range of direct and indirect industries.
Just some thoughts 
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