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Crude prices under pressure

By David Morrison  |  04/12/2018 16:09

Crude prices have recovered a touch this week. But gains have been capped ahead of Thursday’s OPEC meeting

WTI dipped below $50 per barrel last week for the first time since October last year. But it bounced sharply on Monday. Technically, the market was very oversold and just needed a trigger to get shorts to cover their positions. That came after the G20 meeting over the weekend. President Trump said that enough had been agreed with Chinese Premier Xi Jinping to delay the proposed US tariff increase from 1st January to early March next year. In addition, on Sunday it was announced that officials in Alberta, Canada's largest oil producing province, had ordered producers to scale back output by 8.7%, or 325,000 barrels per day (bpd), until excess crude in storage is reduced.

OPEC to cut?

Crude also got a lift on hopes that the world’s largest oil producers (led by Saudi Arabia and Russia but excluding the US) will agree to cut back production at this Thursday’s OPEC meeting. Analysts have calculated that a cut of around 1.3 million bpd would offset the current counter-seasonally increase in inventories and help drive WTI back above $70.

Russia says ‘nyet’

However, following a meeting between Saudi Arabia’s Crown Prince Mohammed bin Salman and Russian President Vladimir Putin at G20, Mr Putin said there would be no new cuts over and above the OPEC+ Vienna Accord levels currently in place. This suggests that Saudi Arabia will have to make the bulk of any production cuts if it wants higher prices. Such a move would risk running up against President Trump who has cheered on lower oil prices while protecting the Saudi Crown Prince from global anger following the murder of Jamal Khashoggi.

Qatar to leave OPEC

Complicating matters even more, on Monday Qatar announced plans to pull out of OPEC in January 2019. Qatar has said it wants to concentrate on producing Liquefied Natural Gas (LNG). It is currently the world’s largest supplier while its output of crude has been falling steadily for several years. But Qatar is also understood to be fed up with the control that Saudi Arabia has over OPEC policy, as well as the increasing influence that Russia (even though it is not a member of the cartel) has over the group. On top of this, Qatar is still smarting from the blockade imposed by Saudi Arabia in June last year for its support of terrorism. Being a relatively small oil producer, the move by Qatar is viewed as largely symbolic. Nevertheless, it does highlight concerns from other OPEC producers over Saudi dominance over the group, particularly given the close relationship between the Kingdom and the US.

Iran won’t cut

Meanwhile, officials in Iran has said that without a serious output cut, oil could tumble to $40. Iran’s OPEC Governor Hossein Kazempour Ardebili, said that OPEC+ should cut a minimum of 1.4 bpd from production to prevent a build-up of oil stocks. He went on to say that Iran had no intention of cutting production while it was under US-imposed sanctions. Iran is also said to be particularly annoyed as the Joint OPEC/non-OPEC Ministerial Monitoring Committee (JMMC) has taken over from OPEC in terms of overall output compliance. The JMMC is dominated by Saudi Arabia and Russia. The former is Iran’s challenger for control over the region while the latter, as noted previously, isn’t even a member of OPEC.

WTI chart

So, there’s plenty to consider going into Thursday with the potential for some very big moves in crude. The trouble is there’s really no way of predicting which way it could go. WTI briefly fell below $50 last week, a level which roughly marks the 76.4% Fibonacci Retracement of the June-October rally. WTI subsequently rallied off here. But it’s worth noting that the bounce so far is chickenfeed given the 35% slump in WTI between early October to the end of last week. It’s also clear that WTI remains very oversold if one considers technical indicators such as the Moving Average Convergence-Divergence (MACD) and Relative Strength Index (RSI). So, the bulls really need to hear that OPEC+ is committed to the 1.3-plus million bpd output cut that everyone is talking about. The trouble is that OPEC doesn’t like putting numbers on these things. The danger then is that the Iranian forecast comes true and we see WTI fall to $40 if there’s no agreement to cut. President Trump will be pleased.


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