Market Analysis: Oil Hits 4-Year Low
Littlefish FX | Nov 27, 2014 06:01AM ET
Oil hits 4-year low ahead of OPEC meeting Today’s meeting of the Organization of the Petroleum Exporting Countries (OPEC) is unlikely to reach a convincing agreement to cut production, in my view. In October the group pumped 30.974mn barrels a day (b/d), according to Bloomberg estimates. This is already almost 1mn b/d over their self-imposed quota of 30mn b/d. Saudi Arabia increased its output during October by 100k b/d and cut its prices for Asian delivery for the fourth month in a row even as the OPEC reference price fell 13% during the month. In order for OPEC to cut its overall output even just back to its quota, Saudi Arabia would have to resume its historical role as the swing producer and cut its output dramatically. Its recent behavior though has been quite the opposite. It seems intent on driving prices down, perhaps to force expensive US shale oil producers out of the market and to punish the Russians, who are supporting the Assad regime in Syria.
I expect oil prices to fall further There is already a surplus of some 600k b/d in the world oil market. Demand for oil usually falls by around 900k b/d in Q1 because of seasonal patterns. Thus OPEC would have to cut production by around 1.5mn b/d just to balance supply and demand at current prices. Moreover, with Europe stagnating and growth in China slowing, the relatively strong growth in the US is not enough to boost overall demand as US energy usage has been falling even while domestic production has been increasing. On top of which, the strong dollar increases the price of oil for consumers outside the US and further dampens demand.
Eventually, OPEC will have to cut production, but it may take more pain to get to that point. OPEC’s own forecast envisions demand for OPEC oil of only 29.2mn b/d during 2015 as non-OPEC producers pump more oil. This means the group will have to cut some 1.8mn b/d eventually or see prices fall further. The group has in the past been able to impose discipline when it was absolutely necessary. Most OPEC countries need oil above 100 dlrs/b in order to balance their budget, so eventually prices should force them to the negotiating table. Furthermore, the production cuts would probably fall mostly on those producers that can best afford it – Saudi Arabia, Kuwait and the UAE. However, it is my view that Saudi Arabia probably wants to see the price fall further for its own strategic reasons and therefore it is far too early to see a market-affecting compromise. The best that the group can hope for at today’s meeting is probably a reaffirmation of its current quota, but unless it can convince the market that it is going to cut back production to that level and stick to it, the news is not likely to boost prices significantly.
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Cheaper oil is a boon to many countries In the US, families with income below USD 50,000 a year spend an average of 21% of their income on energy. Every 10 cent drop in the price of gasoline translates to annual savings of some USD 120 for them. Thus lower oil prices should help consumption in the US and in other oil-consuming countries. European consumers may not benefit as much, because taxes account for at least half of retail gasoline prices and thus the retail price is not as closely tied to the wholesale price of oil. Many EM countries that import oil, such as Turkey, Thailand, Korea, South Africa and Poland will also be beneficiaries. Of course the currencies of oil-producing countries, CAD and NOK in particular, are likely to suffer, as may RUB and MXN.
The schedule: The OPEC meeting starts at 0900 GMT and the press conference to announce the results begins at 1500 GMT.
Yesterday’s market: US data yesterday generally disappointed, with durable goods unexpectedly dropping in October, personal income and spending both missing estimates, Chicago PMI below estimates (although still quite high on an absolute basis), final U of M consumer confidence index for November revised down, and initial jobless claims exceeding forecasts. Fed funds rate expectations fell again, the ninth decline in 10 days. So it was only natural that the dollar would decline against most of its peers. The only exception was NOK, which depreciated after the country’s AKU unemployment rate for September failed to decline as the official unemployment figure had done for the same month. Lower oil prices may also be holding NOK back; CAD, the other major energy currency, was the next weakest unit (although it did gain marginally vs USD).
Today’s (other) events: With the US on holiday today (Thanksgiving), USD weakness may continue in the absence of any USD-positive news coming out. The key event today will probably be ECB President Draghi’s speech in Finland. However, he has spoken several times recently and surprised the market with his dovishness already. It’s hard to imagine that he has anything left to reveal. ECB Governing Council member Jens Weidmann also speaks in Germany; it will be interesting to contrast his comments with Draghi’s.
The main release during the European day will be the German CPI for November. As usual, several of the Lander release their figures before the national figure is released. We would look at the larger ones for guidance on where the headline figure is likely to come in at. The consensus is for a softer figure than last month, which could push down estimates for Eurozone CPI to be released on Friday. Also, the German unemployment rate for November is expected to remain unchanged from October.
Eurozone’s M3 money supply is forecast to have risen 2.6% yoy in October, a slight acceleration from 2.5% yoy in September. This would push the 3-month moving average higher, although the ECB is putting little significance on money supply nowadays. The bloc’s final consumer confidence for November is expected to remain unchanged from the preliminary print.
In Canada, current account deficit for Q3 is forecast to remain more or less at the same levels as in Q2.
The markets are closed in the US due to the Thanksgiving holiday.
In New Zealand, building permits for October are coming out.
h3 The Market/h3 h3 EUR/USD above 1.2500 again/h3EUR/USD continued rising yesterday, moving back above 1.2500 again, but the advance was stopped at 1.2530 (R1). Our momentum studies suggests that the rebound may have not ended yet. The RSI edged up after finding support at its 50 line, while the MACD entered its positive field. However, on the daily chart the overall path remains to the downside and I would expect the recent rebound or any extensions of it to provide renewed selling opportunities. Since I still see positive divergence between our daily oscillators and the price action, I would prefer to see a decisive dip below 1.2360 (S3) before getting more confident on longer-term downtrend. Such a break is likely to pave the way for the 1.2250 area, defined by the lows of August 2012.
• Support: 1.2440 (S1), 1.2400 (S2), 1.2360 (S3).
• Resistance: 1.2530 (R1), 1.2575 (R2), 1.2620 (R3).
h3 USD/JPY corrects lower/h3USD/JPY started correcting lower on Wednesday and during the early European morning it is heading towards the 117.00 (S1) support line. I expect the rate to challenge that barrier. If selling pressure is strong enough to break it, the correction could extend towards the next support line at 115.45 (S2). Our short-term momentum studies maintain a bearish tone. The RSI slid below 50 and is pointing down, while the MACD, already below its trigger, has just obtained a negative sign. Switching to the daily chart, I still see a longer-term uptrend, but our daily momentum signs amplify the case for further retracement. The 14-day RSI is pointing down and looks ready to exit overbought territory, while the daily MACD has topped and fallen below its trigger line.
• Support: 117.00 (S1), 115.45 (S2), 114.00 (S3).
• Resistance: 119.00 (R1), 120.00 (R2), 121.00 (R3).
h3 GBP/USD hits 1.5800/h3GBP/USD firmed up on Wednesday, breaking above 1.5730 (S1), the upper boundary of the short-term sideways range it’s been trading since the 13th of the month. Based on our momentum signals, I still think that the up leg may continue. On the 4-hour chart, both the RSI and the MACD follow upside paths as marked by the black upside support lines. On the daily chart, the 14-day RSI rebounded from its 30 line and moved higher, while the daily MACD, although negative, crossed above its trigger line and is pointing north. A break above 1.5800 (R1) is likely to extend the bullish wave, probably towards the next resistance zone at 1.5950 (R2). Nonetheless, as for the broader trend, the price structure remains lower peaks and lower troughs below the 80-day exponential moving average, thus I would consider the overall picture of GBP/USD to be negative. I would treat the recovery from the 1.5600 (S2) area or any extensions of it as a corrective phase for now.
• Support: 1.5730 (S1), 1.5600 (S2), 1.5500 (S3).
• Resistance: 1.5800 (R1), 1.5950 (R2), 1.6020 (R3).
h3 Gold pulls back after consolidating below 1205/h3Gold moved lower on Wednesday after consolidating slightly below the 1205 (R1) resistance hurdle. That move confirms the negative divergence between our momentum oscillators and the price action. Moreover, the RSI dipped below 50 and is pointing down, while the MACD, even though positive, stays below its trigger line. Taking these momentum signals into account, I would expect the pullback to continue and perhaps target the 1180 (S1) area or the lower boundary of the black upside channel. In the bigger picture, I still see a longer-term downtrend and would therefore treat the recovery from 1132 as a corrective move for now. In the absence of any major bullish trend reversal signal, I would prefer to adopt a “wait and see” stance as far as the overall outlook of the precious metal is concerned.
• Support: 1180 (S1), 1160 (S2), 1146 (S3).
• Resistance: 1205 (R1), 1222 (R2), 1235 (R3).
h3 WTI dips below 73.20/h3WTI extended its fall on Wednesday and during the Asian morning today it broke below the support (turned into resistance) of 73.20 (R1). Such a move confirms a lower low on the daily chart and opens the way for further declines, perhaps towards the 71.00 (S1) area, determined by the lows of July and August 2010. Looking at the near-term momentum indicators, the RSI moved lower and is now testing its 30 line, while the MACD lies below both its zero and trigger lines, pointing south. These signs corroborate the negative picture of WTI. On the daily chart, the price structure is still lower highs and lower lows below both the 50- and the 200-day moving averages, thus I believe that the overall path remains to the downside.
• Support: 71.00 (S1), 70.00 (S2), 67.00 (S3).
• Resistance: 73.20 (R1), 75.50 (R2), 77.80 (R3).
h3 BENCHMARK CURRENCY RATES - DAILY GAINERS AND LOSERS/h3
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