Commodities

Oil bears wake from hibernation as OPEC decision approaches – Commodity News

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Recent developments have seen oil prices correct lower, amid speculation that major OPEC and non-OPEC producers may soon “open the taps” and raise production to offset supply losses from Iran and Venezuela. While the final decision will be taken at the June 22 OPEC meeting, prices are likely to move well ahead of that time on any comments from various OPEC officials, with other potential market-movers for oil relating to the US dollar, global trade risks, and geopolitical events.

Oil prices edged lower in the past week, pulling back from the multi-year peaks they reached after the US unilaterally withdrew from the Iran nuclear deal. The correction followed news that major OPEC and non-OPEC producers are considering raising their production to offset potential supply outages stemming from Iran and Venezuela. The OPEC-led producers have been restricting their output since January 2017, cutting supply by approximately 1.8 million barrels per day (bpd) in an attempt to reduce oversupply in the market and boost prices, which at the time when the deal was struck were trading at much lower levels.

While nothing is certain yet, it appears Saudi Arabia and Russia are in talks over how much supply to bring back to the market, with market chatter suggesting 300,000 bpd at the least, or 1 million bpd at the most. The news was well-received by oil bears, as OPEC and Russia are the only major players with enough spare capacity to be able to offset such supply shortages; US producers are facing infrastructure constraints, which is limiting their ability to export as much as they would like.

The final announcement will probably come at the June 22 OPEC meeting, and oil prices are likely to move accordingly; higher in case of something around the lower bound of the estimates at 300k, and lower if producers meet expectations for a larger production increase close to 1 million. Of course, speculation regarding what these suppliers may do will probably drive prices well ahead of that gathering. Any comments from the various energy ministers prior to June 22 – and particularly from Saudi Arabia’s – could trigger sizeable moves in prices as investors attempt to front-run what producers may finally decide to do.

On the other side of the equation, it’s still highly uncertain how many barrels may be lost from Iran and Venezuela, and that picture is unlikely to be cleared up anytime soon. Projections range from 500k to 1.5 million bpd, though considering how many details are still unknown about the effectiveness of sanctions on Iran and Venezuela’s ability (or inability) to raise its output, such estimates likely carry a very high degree of uncertainty. This begs the question: if OPEC does raise output as a response to these outages, would it be doing so “in the dark” in terms of how much it should raise to keep things balanced? If so, this suggests producers may opt for a cautious approach, increasing their output only a little as a start, until the situation clears up and they can make more informed decisions on whether to raise it further.

Other considerations for oil relate to the US dollar, global trade, and geopolitical risks in the Middle East. The greenback has been on the rise recently, which is typically a factor exerting downward pressure on oil prices. Since the precious liquid is priced in dollars, when the greenback appreciates it becomes more expensive for investors using foreign currencies to buy it, and vice versa. Then, there are global trade risks, which seem set to intensify further in the coming weeks, clouding the outlook for robust global oil demand. Also, of importance will be how the Iranian-Israeli standoff plays out; tensions between the two have intensified recently and the situation bears close monitoring. Broadly speaking, anything that points to instability in the Middle East tends to be bullish for oil, as the risk of fresh supply outages increases. 

Technically, looking at WTI prices, advances could encounter initial resistance near the $68.70 per barrel area, marked by the highs of May 30. An upside break of that zone could open the way for a test of $70.30, a level marked by the inside swing low on May 14. Even higher, focus would increasingly turn to the three-and-a-half year high of $72.83, reached on May 22.

On the downside, and in case of declines in WTI, support may be found near the crossroads for the $65.80 barrier and the uptrend line taken from the lows of September 11. If the bears manage to cross below that hurdle, the $64.10 territory could come into play, identified by the tops of February 26. Lower still, attention could shift to the $61.80 handle, which halted the liquid’s decline on April 6.