Oil Falls to Two-Month Low as Traders Focus on Record Supplies
Comment of the Day

March 08 2017

Commentary by Eoin Treacy

Oil Falls to Two-Month Low as Traders Focus on Record Supplies

This article by Mark Shenk for Bloomberg may be of interest to subscribers. Here is a section:

Oil has fluctuated above $50 a barrel since the Organization of Petroleum Exporting Countries and other nations started trimming supply on Jan. 1 to reduce a glut. Saudi Arabia and Russia, the architects of the deal, presented a united front on complying with the cuts at the CERAWeek conference Tuesday in Houston. Alongside officials from Iraq and Mexico, they insisted the curbs are working. Managed money boosted wagers that U.S. oil futures would rise to a record last month.

"There’s a huge amount of speculative length in the market and they’re starting to bail," Bob Yawger, director of the futures division at Mizuho Securities USA Inc. in New York, said by telephone. "OPEC didn’t do a good job at CERA convincing the market that it would roll over the cuts into the second half of the year."

 

Eoin Treacy's view

Any arbitrage in the futures curve has been squeezed out by hedging activity over the last couple of months as unconventional producers locked in what are economic prices for their activities. That has effectively kept a lid on prices despite OPEC’s quite disciplined cut to supply. The fact the USA is now both a major new source of supply and exporting is a challenge for the cartel. 

Exxon Mobil’s decision to spend $20 billion on Gulf of Mexico refining capacity is undoubtedly influenced by surging US supply but the potential for Canadian heavy crude to acquire an export route, south via pipelines may also be influencing that decision. 

“Ranges are explosions waiting to happen” has been one of the primary lessons at The Chart Seminar for years. The uncharacteristically inert environment evident on crude oil was a perfect example of just such potential and now appears to be in the process of being resolved with today’s large downward dynamic. Brent crude is now testing the region of the trend mean and the upper side of the underlying range. A clear upward dynamic will be required to check the downward bias. 

If oil prices break down from this level we can then conclude $55 represents a significant area of resistance in what is likely to be a lengthy ranging environment for oil prices where trough to peak swings could be in the order of 100%. 

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