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Oil Market: Shaky as Always

By:
FBS
Published: Oct 3, 2019, 13:40 UTC

It is always interesting to look at the oil market, as many factors affect it. The middle of September was particularly remarkable due to the escalation of tensions in the Middle East.

Oil Market: Shaky as Always

The unexpected attack on the Saudi Aramco oil production facility resulted in a gap up of oil prices. Even though the company managed to restore its oil capacity in a week, the odds for the crude’s prices to jump higher remain. So, what is most likely for oil: to retest the recent highs of September 16, or to slide towards the August’s lows? Below, we considered the main events and the news, which may help us to answer this question.

Tensions in the Middle East

The Middle Eastern oil has been seen as a “resource curse” by analysts, as it twisted the situation in the countries producing it right after the exploration, leading them to undesirable political and economic outcomes. The battle for the share in the oil market is strictly connected with the ongoing cold war between two leading oil producers in the region: Saudi Arabia (supported by US) and the Islamic Republic of Iran. As a result, the Persian crisis continues to move the oil prices up with the fresh reports about the shot drones and seized tankers.

The recent attack of Saudi Aramco’s plants may lead to a further escalation of tensions in the Middle East. Indeed, the act of terror against a Saudi-owned company was a shocking event for the oil market. However, the company managed to restore its production levels in a quite short period. This news helped bears to pull the oil prices back to the pre-attack levels. It calmed down investors a little bit. The long-term picture is not so certain, though. While the Iran-aligned Houthi movement claimed the responsibility for sending drones to oil production facilities, Saudi Arabia and the USA did not exclude the possibility of Iran’s officials to stand behind that decision. Iran rejected that. So, there is a chance of response actions by Saudi Arabia, which may push the oil prices up again.

But let’s distract from the “what if” game and try to understand why more and more traders give a bearish outlook for the oil market in the long-term.

US-China trade war is a bearish factor

The unexpected run-off of supply distracted the oil market from a long-lasting problem of demand connected with US-China trade relations. As China and the US are known as the leading importers of crude oil with the 20.2% and 13.8% of the world’s total imports respectively (Table 1), the escalation of trade tensions between the countries does nothing good to the oil market, too. Fresh tariffs imposed at the beginning of September on both countries’ exports increased worries over a deepening recession. As it is known, the global economic slowdown reduces the demand for oil. Falling demand drives the oil prices down.

Table 1 – Leading oil-importing countries (2018)

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The question is whether the output cuts by the Organization of the Petroleum Exporting Countries (OPEC) are enough to keep the oil market away from oversupply? Analysts doubt about it. They mention the uncertainties in US-China trade relations, as the probability of trade war’s escalation remains at 55%. This figure shows that reaching a trade deal soon seems unlikely. Also, the news that Iran and China have reached an oil deal reduces the chances of finding the common points between the US and Chinese sides now. That is why the oil demand is expected to stay under pressure. The possible upside movement may come on the further decisions concerning the oil output by OPEC.

OPEC is cautious

The quick restoration of Saudi Arabia’s oil production called off the need for an emergency meeting of the Organization of the Petroleum Exporting Countries. The organization will continue to monitor the global oil balance of supply and demand, as the market uncertainties remain. During the 16th meeting of OPEC+ on September 12, Iraq and Nigeria agreed to join the countries, which cut their oil production. Further possible changes to the current plan may be expected during the OPEC and non- OPEC meetings on December 5-6. If the oil-producing countries, including Russia, agree on more production cuts, the oil prices will rise. However, OPEC members are not the only oil producers. Let’s take a look at the US crude oil.

Don’t write the US oil off

The USA keeps being the number one oil producer in the world. Despite the global supply issue, the number of barrels of crude oil held in inventory by commercial firms has been constantly growing during the last weeks of September (Chart 1). If it continues to rise, it will drag the oil prices down.

Chart 1 – Change in US crude oil inventories (August 1-October 1, 2019)

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Let’s take a look at market moves

On the weekly chart, WTI has been trading within a triangle pattern. In the middle of September, the price tested the highs above the 100-week SMA at $60.88 and started to correct to the downside. At the end of September, the crude’s price stuck below the 50-week SMA. This situation increases bears’ chance on reaching the support at $53.30 (200-week SMA). This level lies close to the lower border of the triangle pattern. If the price breaks the formation to the downside, the next support will lie at $50.7. Bulls keep their attention on the $57.4 resistance level. The breakout of this level will help buyers to retest $60.88. The next resistance will be placed at $63.6.

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So, what do we have? The bullish factors include tensions in the Middle East and OPEC output cuts. However, the first one may happen unexpectedly, while the OPEC meeting is planned only in December. Sudden news may bring short-term upside momentum to oil prices. Besides that, the overall picture remains bearish with the US and China not likely to strike a trade deal any time soon. Growing oil production in the US is also a problem for bulls.

 

About the Author

FBScontributor

FBS is an international broker with more than 190 countries of presence. FBS organizes seminars and special events, providing its clients with training materials, cutting-edge trading technologies and the latest strategies in the Forex market.

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