Since one of the major concerns right now in the oil markets is, quite rightly, the state of the world’'s economies, it is no surprise that oil prices have recently been shadowing the mood of equity indices, This has been the case all this week, including yesterday, up until we drew close to the first of this week’s inventories data releases by the API, at which point the WTI temporarily let go of the hand of its equity mentors and just splashed around last week’s closing levels.
The API figure was a surprise in that it actually posted a build of nearly 7 mill barrels for the week ending 21.12. instead of the anticipated draw of around 3 mill barrels. Normal logic would suggest that this should have thrown oil prices back towards the recent lows, but it didn’t.
I think there are two main reasons for this. The first being the continued strength in the equities market. The S&P continued to make new highs after Wednesday’s recovery and reversal of Monday’s big fall - even though the overall downtrend in equities is still intact.
The second reason is more mundane. There are frequently discrepancies, even opposites, between the Inventories data from API and the data released by the EIA usually on the following day. The EIA releases its version of the inventories data for the same week ending 21.12. later today and is still expected to show a draw. Therefore it is natural that the market would wait to see the EIA figures before reacting. In my opinion the EIA figures do carry greater credibility in the market.
In the absence of any other factors today I suspect we will see a quiet, meandering type of trading day today until the figures are released.
In the meantime, if we revisit the weekly chart, we can see how closely and widely this support zone, highlighted in some earlier posts, is being watched - if we look at the last three lows in 2016, 2017 and last Monday. All are within a few ticks of each other.
I interpret this as demonstrating that the oil industry itself sees this as the low area for it to still function normally and profitably, Prices below this start to destroy profits and repel investment money. If that is the case, then the only cause that would push prices down through this support zone would be widespread economic recession and a consequent slump in demand globally. I don’t think the other reason - excessive inventories build-up - is likely to become a real, prolonged problem because OPEC+Russia and others will be doing all that is necessary to keep a healthy balance in supplies and a stable price.
The daily chart gives a better perspective on this week’s moves. I think it is now quite clear that Monday’s collapse in both equities and oil prices was a freak event catalysed by events such as the US govt temporary shutdown and comments by the US treasury concerning the liquidity of the top US banks. A combination of existing downtrends, thin markets and negative factors pushed prices into a self-propelled decline.
Monday’s falls were quickly reversed on Wednesday. But, for oil, only back to the bottom end of last week’s range. If one ignores the daily bars for Monday and Wednesday, we are still paused at this same point reached last week. That is not very positive!
OPEC’s agreed production cuts do not start until the new year and will not come into effect immediately, rather the objectives will be achieved over the term of the agreement. But there are already comments confirming that OPEC will revue the situation as it starts to evolve and intervene if necessary.
I suspect the first “big news” in the New Year will come from new trade talks between US and China.