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Crude pulls back from multi-year highs

By David Morrison  |  04/07/2018 15:06

This article looks at the rally in crude since OPEC+ meetings last month

Front-month WTI crude briefly topped $75 on Tuesday taking it to its highest level since November 2014. But it suddenly reversed course to break below $73 just a couple of hours later, ahead of the truncated Independence Day break. The sell-off followed publication of a story from Al Jazeera, quoting the Saudi Press Agency, saying that Saudi Arabia was preparing to increase output further to stabilise the market.

This follows on from US President Trump’s claim over the weekend that he had persuaded Mohammad bin Salman, Crown Prince of Saudi Arabia, to agree to raise output by up to two million barrels per day (bpd). The news won’t please Iran, already fuming over Trump’s renewal of sanctions against the country which is a senior OPEC member. This in turn will add to tensions within OPEC as Venezuela is another country pushing back against what they see as unacceptable interference from the US in the oil cartel’s business.
The news from Saudi Arabia comes after a sharp rally in crude that began ahead of and carried on after the OPEC+ meetings on 21st and 22nd June. This was despite the expectation, subsequently borne out, that this group of oil producers would agree to add back supply by reducing the 1.8 million bpd output cut that has been in place since the beginning of last year. Although there was a lack of clarity after the meeting, it emerged that OPEC+ had agreed to boost output by one million bpd. This was higher than many early forecasts but well below the top end of estimates which coalesced around an increase of up to one and a half million bpd.

The problem is that a loss of output from Venezuela and Libya, together with US-led sanctions on Iran, look set to take off as much as 1.3 million bpd going into the second half of the year. Consequently, a promise from Saudi Arabia to boost output by more than agreed by OPEC+ could offset lost supply and help keep a lid on prices. The problem is that there are doubts that the Kingdom has this spare capacity, despite an assurance from the chief executive of Saudi Aramco that the Kingdom has the capacity to produce an additional 2 million bpd.

Chart-wise, WTI is back within the upward trend channel that has been building since last summer (shown here with Andrews’ Pitchfork). However, it is looking a touch overbought at current levels although the RSI has dipped back below 70 which may point to some consolidation rather than a full-blown sell-off.
Nevertheless, concerns over a lack of supply due to the disruptions noted above and as US inventories continue to decline may support the market. On top of this there are currently no indications of a drop off in global demand growth despite worries over the economic outlook for emerging markets and evidence of slowing growth in China. However, if Saudi Arabia does come up with an additional 2 million bpd then oil could fall sharply. But the fall-out within OPEC could be spectacular.

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