As foreseen from about last week at the Globex open on Sunday when Crude was trading around 49.78, prices for WTI Crude has fallen about 13.5 % overall and there appears to be no end in sight given that the OPEC meeting in November still has widespread posturing among member countries and disagreements among the larger producers such as Saudi Arabia, Iraq & Iran. Some of the larger producers from the past like Nigeria & Libya are slowly unfolding out of unrest conditions and adding to their much needed revenue stream by ramping up production for sales largely to the Asian sub-continent. In the production curtailment area, it appears that market participants, (which in larger volume trading is more of the producers these days) will ignore the vows of reducing output from producers like Iran and Iraq as they’ve been historically known to never adhere to such agreements. The bulk of the reduction then will need to come from Saudi Arabia which has been notorious to always stay in the opposite side of the fence from Iran and this stance will likely cause more speculative output than anything else.
OPEC members may have to come up with an even larger cut to send a strong message about their seriousness on re-balancing and shock the market higher. In recent days however, Saudi Arabia has been non committal of the cuts of the magnitude that may be needed for any serious re-balancing effort on the Global Oil Inventory situation. In terms of daily numbers from OPEC, production rose by 240,000 barrels per day to a record 33.64 million b/pd in October 2016. Output based on cursory computations sit anywhere between 640,000 ~ 1.14 million b/pd well above the production ceiling of being considered for formal ratification in November. The impact on timespreads for crude oil has been significant and each time there is a ramp up in inventory levels, this timespread which is driven by supply and demand, widens.
I’ve made attempts to analyze the chart for my readers here on the yearly chart mapping this from the February low to the October high made in the recent past. If there is no agreement in November from OPEC, I am expecting Crude to pullback to between $36~37 on a continuous contract price basis. A more accurate read will be after Nov 30th when OPEC concludes it’s meetings for the year and makes an attempt to agree on earlier proforma production level agreements. On the flip side, if we see an agreement, I expect us to rally conveniently into the upper 50’s into the end of the year.
Crude Oil Yearly Chart Analysis