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Oil is still stuck a Bearish Spell

August 22, 2016


WTI $ 48.25 = In my July 15, 2016, note “Why Oil Prices will not Surpass $ 60-65”, $ 10 dip did occur and is now undergoing correction. My view on oil remains unchanged and bearish, as it need to break 1st Resistance levels of $ 52-55 and then major resistance level of $ 62-65 for flip, which is not a preferred move.

Nothing has really changed. Optimism shown by the Qatari Minister of Energy about 2-weeks ago, expressing positive sentiments is without any evidential reasoning, which gave short push to oil, as he is also the current OPEC President.
The truth is that despite 40 pct of the global oil contribution by the 13-members OPEC countries, its standing without Saudi Arabia is nothing.
Oil market volatility is here to stay until Geo-political condition gets better and uncertainty is removed.

To support OPEC’s proposal cut, Saudi Arabia has to accept its oil partners freezing output proposal to lift oil prices. But Saudi’s would never agree, as they sense risk that when they slash production other producers will jump in to get hold of the market share. This could be one of the reasons that they opted to walk away from Doha talk in April that could have paved way to limit oil output.

In their previous OPEC gatherings, Saudi Arabia has always demanded conditional production cut from the major oil producers, which never found any support from its partners. Saudi Arabia’s average oil production is more than 10.2 million barrels per days or 10.62 pct of the global demand/production. In six-years Saudi production soared from 7.8 million barrels per day to its current level or by 2.4 mb/p

But, there are major factors too, as trio Saudi/Iran and Russian tension should cool down. First sign of easing will be when they all are back on talking terms, which looks unlikely to happen in present circumstances.

Therefore, Saudi Arabia may prefer to maintain pressure on Iran by not allowing prices to rise much higher. Whereas, unless EU-USA sanctions against Russia is removed, oil politics will dominate and price recovery will remain a difficult proposition that deprives them of cash money.

From Iran’s perspective that was producing 3.7 mb per day in 2010, its production fell by nearly one million barrels per day in next 3 years. After lifting of sanctions around 3rd quarter of 2015, it is now trying boosting its production to attain its lost market share.

But Iran is unlikely to cut its production because of its aging oil field, which according to some analyst is producing 10 pct less oil. Therefore, to upgrade its infrastructure, which requires $ 10-15 Billion funding, in next 5-years its plans to produce 4.6 mb per day to meet both the ends? All this may not be as easy and simply for Iran because US Dollar based transaction is still not freely permissible.

I am of view that oil after briefly hitting below $ 40 marks or nearly 20 pct decline is simply in a correction mode, as the current move is caused by short covering and not due to unusual demand.

The economies of major oil countries will continue to struggle, as the glut is unavoidable. There are faced with threat of deficit/debt

Global growth projection by leading world agencies such as IMF, World Bank, and UN is murky.

FED is unsure about the timing of US growth that has slowed down a bit. Despite decade old QE and negative interest rate policy, BOJ continues to struggle. ECB has already lost its path and is not out of woods since nearly 8-years, BREXIT is adding to its woes, as it brings more risk and uncertainty to Europe and around the Globe.

Therefore, I remain bearish for oil. The levels to watch is $ 52-55 zones, which is tough to break and then $ 62-65 is crucial level for future direction, which is not a favored move. Break of $ 44.20 will encourage for a test of $ 38.90, targeting $ 35 in Medium to Long Term.     

(Disclaimer applies in my post, which means that the perspective is my personal view. I have made every effort to ensure accuracy of information provided. However, accuracy cannot be guaranteed. This article is strictly for information and not intended for Trade or Business Transaction). 

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