Crude oil rangebound

By David Morrison  |  25/01/2019 15:09

Rising geopolitical tensions together with an unexpected pick-up in US inventories are leading to swings in the oil price within a relatively narrow range
 
Oil prices oscillated between positive and negative territory on Friday following a sharp bounce in the previous day’s session. Traders have been responding to US inventory data and the political upheaval in Venezuela. The US has led a group of countries from Latin America and elsewhere in backing Venezuelan opposition leader Juan Guaido who has declared himself interim president. This has led Nicolas Maduro, the president since 2013, to break relations with the US leading to concerns that the US could now impose sanctions on Venezuelan oil exports. Venezuela’s oil industry is already in turmoil and production has fallen dramatically. Yet it is an OPEC member and has the largest proven oil reserves of any country in the world.
 
US inventories rise
 
Countering the upside move in crude caused by this potential supply disruption was an unexpectedly large rise in US inventories. Yesterday the Energy Information Administration reported an eight-million-barrel increase in crude stockpiles for the week ending 18^th January. Analysts had expected a 200,000-barrel drawdown. These numbers supported data from the American Petroleum Institute on Wednesday which recorded a 6.5-million-barrel crude build against a forecast drawdown of 500,000 barrels. The sharp increase in US inventories comes on the back of fresh record levels of US production. This is going a long way to offset the OPEC+ production cuts agreed in early December last year. This was when OPEC and other major oil producers (excluding the US) agreed to cut output by 1.2 million barrels per day (bpd). News of the agreement did nothing to stem the ongoing sell-off in crude which continued for some weeks. For a start, analysts estimated that a cut of at least 1.5 million bpd was needed to make a significant dent in global inventories. Also, the production cuts were based on October output data when the major OPEC+ producers were pumping at record levels, since exceeded. Also, it was clear that Russia wasn’t as worried about low oil prices as Saudi Arabia and is taking its time in implementing its promised cuts.
 
Global demand growth forecast to slow
 
Meanwhile, several agencies and research outlets (including OPEC) have revised down their oil demand growth forecasts for 2019. This is hardly surprising given disappointing economic data releases (Manufacturing PMIs and Industrial Production, in particular) from the US, China and the Euro zone. We’ve also seen the IMF downgrade its estimates for global growth for this year and next. At the same time, the US and China are engaged in a trade dispute which is only adding to concerns over the economic outlook, particularly given that we’re now approaching the 10-year anniversary of the nadir of the Financial Crisis, and one of the longest bull-runs in history.
 
WTI chart
 
The front month WTI contract remains stuck in a narrow range between $54 and $52. This is comfortably above support around the $50.50 level which marks the 23.6% Fibonacci Retracement of the October-December 2018 sell-off. It’s also some distance below $55.50 resistance marking the 38.2% Fib retracement of the same move. So, there’s no clear signal about where prices could go next. Any breakthrough in the US/China trade dispute could certainly be positive in the short-term, but it’s worth remembering that the slowdown in Chinese GDP growth began well before Trump imposed tariffs. It’s also important to keep an eye on US shale oil production. While this has been booming for several years, there’s been a sharp drop in the rig count recently due to the slump in the oil price. If US production starts to pull back from record levels, then that could also see prices rise. But ultimately, much now depends on the outlook for global growth and how central bankers respond.

 
 
 
 
 
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