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Crude oil slumps

By David Morrison  |  13/11/2018 16:02
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Both Brent and WTI have fallen over 20% in just six weeks. This comes despite efforts from oil producers to boost prices with renewed talk of output cuts
 
Crude oil has fallen sharply over the last six weeks. As the chart of WTI shows, prices have now retraced 50% of their June 2017-October 2018 rally, for a fall of 23% from the October high to Monday’s close. There have been further losses today which saw the price of Brent tumble below $70 per barrel. This is the ‘danger level’ highlighted by Najib Razak, Malaysia’s former Prime Minister, below which the country risks a plunge in its currency, a blow-out of its budget deficit and a likely downgrade of its credit rating in 2019. This warning suggests that we haven’t seen the end of the emerging market crisis which fermented earlier this year on the back of a rising dollar. But this time, it will be the double-whammy of dwindling revenues for oil producers along with dollar-denominated debt that could trigger another flight to safer havens.

$100 oil?

Less than two months ago several respected analysts were forecasting that oil would be trading over $100 per barrel early next year before pushing up to $120 by the end of the first quarter. These forecasts cited US sanctions on Iran, strong global demand and the continuation of the OPEC and non-OPEC supply cut agreement. This was launched in January 2017 to counter lower prices and is still in place although producers began to reverse cuts in June this year.

Record output

In early October Reuters reported that Saudi Arabia and Russia had agreed to a private deal to boost output. Reports show that over the last few months the world’s three largest producers, the US, Russia and Saudi Arabia, have all hit fresh records in terms of crude production. It looks as if this was the trigger for a turn-around in prices. On top of this there have been concerns that global demand growth won’t increase by as much as previously forecast. This follows on from warnings from the IMF last month that it now expects a global economic slowdown, triggered by soaring debt levels and rising trade protectionism. This can already be seen in China’s GDP numbers where the rate of GDP growth is slowing.

Production cuts?

Then on Sunday the Joint Ministerial Monitoring Committee (JMMC), which comprises OPEC and non-OPEC oil producers, said members were once again preparing to cut production by up to a million barrels per day (bpd). They cited their review of oil’s supply and demand fundamentals which pointed to weakening demand in 2019 thanks to economic uncertainties, together with oversupply. In addition, Saudi Arabia’s energy minister, Khalid al Falih, said that the market overreacted to concerns over supply shortages when it sent prices to four-year highs last month. He added that the market was now overreacting in the opposite direction by worries over falling demand and oversupply when it drove prices down by over 20% in just six weeks.

Trump tweets

Crude was down a further 2% this morning. The move followed a Trump tweet in which the US president wrote: "Hopefully, Saudi Arabia and OPEC will not be cutting oil production. Oil prices should be much lower based on supply!" he wrote on Twitter. On Monday WTI crude prices recorded their 11th consecutive negative session, the longest ever run of successive daily declines. In an earlier press conference, President Trump said that he cut some countries some slack on Iranian sanctions as he had no wish to be responsible for higher energy prices. He went on to take credit for the recent decline in oil and said he was no fan of high prices which he viewed as a tax.

Sell-off continues

At the time of writing, WTI and Brent are both down around 4% on the day in a move that has all the hallmarks of bull market capitulation. It is looking very oversold as can be seen from the Relative Strength Indicator which has fallen well below 30. This comes despite the JMMC’s efforts to talk up the price with the threat of production cuts. At some stage we’ll get a bounce, but identifying the right level is tricky in this kind of market. After all, it’s dangerous trying to catch a falling knife. The next significant support area for WTI comes in around $55, which marks the 61.8% Fibonacci Retracement of the June 2016-October 2018 rally. It also worked as resistance between December 2016-February 2017. But buyers will also want to see oil producers come up with a solid agreement for substantial output cuts, rather than just jawboning and hoping for the best.
 

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