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Daily Reports 17

Crude runs into resistance

By David Morrison  |  05/02/2019 15:57

Crude oil was firmer in early trade this morning. But it turned lower as it faced resistance and as the US dollar spiked higher

Crude oil was firmer in early trade on Tuesday with traders citing OPEC+ production cuts and US sanctions on Venezuela as responsible for crimping supply. But there was a sudden turnaround prior to the US open which saw crude pull back sharply. Some commentators blamed weaker-than-expected US Factory Orders for the sell-off, but this seems unlikely as this number was released yesterday, and the data was already well out of date due to the government shut-down. A more likely explanation for the price reversal is that crude is running into resistance, while a pick-up in the US dollar has also helped to dampen prices.
Chart resistance
Looking at the chart of front-month WTI, it appears that the 38.2% Fibonacci Retracement of the September-December 2018 sell-off (around $55.50) is acting as resistance. The corresponding level for the front-month Brent contract comes in around $64. Sticking with WTI, a break above here could see prices test resistance around $59.60 which marks the 50% retracement of the Sep-Dec sell-off. But repeated failure to break above $55.50 would suggest that support around $50.50 would be the first significant downside target.
OPEC+ production cuts

As mentioned before, oil has risen in part due to US sanctions on Venezuela. These are expected to have a similar effect on supply as last year’s Iranian (partial) embargo. Oil is also getting a boost from the OPEC+ cuts which were agreed in early December. The 1.2 million barrels per day production cut agreement had little initial effect on oil prices. Firstly, the cut wasn’t considered large enough to make a significant impact on overflowing global inventories. Secondly, investors doubted that either Saudi Arabia or Russia was as committed to the deal as they had been when the previous output cut was arranged. However, there’s now evidence that the output reduction is starting to work through.
A Reuters survey has shown that OPEC production has declined by the largest amount in two years. Saudi Arabia has cut more than expected, while Iranian, Libyan and Venezuelan production has declined for other reasons.  
Demand growth
Meanwhile, there are big question marks over future demand growth. Recent data releases indicate that China’s economy continues to slow, and this is having a knock-on effect across many Asian Pacific economies. However, the outlook for the US is broadly positive, particularly given last week’s better-than-expected payroll data and ISM Manufacturing PMI. Today’s US ISM Non-Manufacturing PMI was a bit disappointing, but overall the expectation is that US economic growth will continue to be the strongest out of the developed world. Of course, this raises a question about why the Federal Reserve felt the need to turn dovish. The US central bank has said it will now be patient regarding adjustments to the fed funds rate.  In addition, it will consider adjusting its balance sheet reduction programme if conditions warrant a change.

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