Oil Down Despite OPEC Production Cut Announcement
ORBEX | Dec 13, 2018 06:53AM ET
Crude oil prices this week turned lower once again despite the latest data from the Energy Information Administration, released yesterday, showing that US crude stocks experienced a less than expected drawdown.
In the week ending December 7th, crude oil inventories fell by 1.2 million barrels, much less than the forecast 10.18 million barrels. This just the second weekly drawdown of the last ten weeks and while it is certainly a move in the right direction, it is far less than the 10.18 million barrels that crude bulls were hoping for.
Opposing Market Forces
The stagnant price action in crude this week reflects the opposing market forces which traders are currently battling. On the one hand, prices have been buoyed by news of a successful OPEC meeting last week, resulting in the announcement of a 1 million + barrels per day reduction in crude production to start in January.
On the other, traders are still dealing with the fact that oil prices continue to sit at the bottom of a 30% decline, and traders are skeptical about the likelihood of the OPEC deal going ahead as expected.
OPEC has often struggled with successfully implementing agreed cuts and increases in production with disobedience being the key hurdle. The jealousy and competition among OPEC’s members mean that there is often a lot of foul play and it could be that we see some members covertly keeping production at or near current level, not honoring the cut.
Russia & Other Nations to Reduce Output Also
In terms of how the reductions will work, OPEC has announced that its members will be responsible for a combined reduction of around 800k barrels per day while a group of OPEC’s allies, led by Russia, has agreed to a combined cut of around 400k barrels per day.
One major issue still standing in the way of a proper recovery in oil prices, is that of surging US production. Crude oil production in the US has risen to record high levels over recent months and shows no sign of slowing down.
Many question the influence the President is having on production in the US given his constant calls for lower prices over recent months. The President has been particularly vocal on his Twitter feed where he has consistently called on Saudi Arabia and OPEC to increase production in a bid to keep prices low. Trump has yet to make any official comment on the oil cuts, but he certainly won’t be pleased with such news.
Gradual Reduction Raises Doubts About the Impact of The Cuts
Furthermore, although Russia has agreed to a production cut it has said that its own reduction in output will be down at a slow and gradual pace meaning they won’t simply cut production at once. If other oil producing nations involved in the deal adopt a similar approach, this means the impact of the production cuts will be far less potent.
Get The News You Want
Indeed, market skepticism over the likelihood of these cuts going ahead as planned can be seen in the latest institutional positioning data with asset managers having slashed long positions in crude to three-year lows since the beginning of December despite news of the deal.
Technical Perspective
The chart clearly shows the severity of the declines in oil, and despite crude having been able to find support at the 50.96 level, prices have once again turned lower and are now testing the level again. If we see a break below this level, we have open water down to the 40.48 – 42.25 level where we have confluence between a raft of prior swing lows, as well as the completion of a large ABCD symmetry pattern, offering support.
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.