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Oil Prices Plunge Amid Concerns U.S. Output May Negate OPEC’s Production Cuts

By:
James Hyerczyk
Published: Jan 9, 2017, 17:44 UTC

March West Texas Intermediate Crude Oil is down 2.92% at the mid-session and March Brent Crude Oil is off 2.96% on increased concerns over the possible

Crude oil

March West Texas Intermediate Crude Oil is down 2.92% at the mid-session and March Brent Crude Oil is off 2.96% on increased concerns over the possible negative effects increasing U.S. production may have on OPEC’s plan to cut production, trim the global surplus and stabilize prices.

On paper, traders seem to be optimistic over the proposed production cuts by OPEC and non-OPEC countries, but today’s price action suggests something other than optimism.

One catalyst behind today’s weakness if the rising U.S. rig count. Last Friday, the oil services company, Baker Hughes, announced that U.S. energy companies added rigs for a 10th consecutive week. Additionally, analysts at Barclay forecast the rig count could move from 529 to 850-875 by the end of the year.

Bearish traders are also citing the stronger U.S. Dollar as one reason any rallies could be capped. Traders are also watching the activity of Iraq very closely. According to Reuters, Iraq’s State Oil Marketing Company (SOMO) had given three buyers in Asia and Europe full supply allocations for February.

Today’s price action suggests that investors may be increasing their short positions in anticipation of further non-compliance issues with Iraq.

Gold

February Comex Gold is trading higher at the mid-session amid uncertainty over Trump’s ability to run a government. Gold is also being underpinned today by the weaker U.S. Dollar and the struggling stock market. A weaker dollar tends to lead to increased foreign demand. Falling equity prices could drive investors into gold, which in this case would be considered a safe haven trade.

Forex

Lower demand for risky assets is helping the Japanese Yen rally on Monday. Generally weaker equity prices are also underpinning the Yen because of the carry trade. A drop in U.S. Treasury yields may be putting pressure on the U.S. Dollar.

The British Pound collapsed again on Monday after weekend comments from British Prime Minister Theresa May. She basically said she was not interested in keeping “bits of membership” of the European Union.

U.S. Stocks

The three major U.S. stock indexes were trading mixed on Monday. Lower oil prices pressured the Dow and the S&P 500 Index, while firm technology stocks helped send the Nasdaq Composite into a new contract high.

At this time, investors remained focused on economic policies, but nervous over the start of earnings season. Additionally, investors have to deal with a plethora of outside events this week including Obama’s farewell speech, the start of the Senate Confirmation Hearings for Trump’s Cabinet nominees and Trump’s first press conference.

About the Author

James is a Florida-based technical analyst, market researcher, educator and trader with 35+ years of experience. He is an expert in the area of patterns, price and time analysis as it applies to futures, Forex, and stocks.

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