Daily Crude Oil Analsys

Crude Oil story for Tuesday, Dec 6th

WTI Crude intraday trade plan

Dec 6th 2016 Updated at 10:18 pm EST on Dec 5th 2016

For Friday Dec 5th I’d written “While the short term trend remains bullish, crude has important resistance within a 40-point area that forms between 51.90~52.30. Holding below the small double top at 51.70~51.80 will targets 51.20~51.15, (which has occurred as I write this tonight) and then seemingly minor support at 50.80~50.75.” We hit 52.42 and retraced past the close at 51.79 all the way down to 50.92!

For the upside forecast today, I have to repeat my “range of resistance” story again which is between 51.90~52.30. A 2-day close above at the very least is required to confirm a breakout, but it is likely to be volatile. This would be a big buy signal longer term. Initial targets are 53.15~53.10, 53.50, 53.85~53.90, 5410~54.15.

While the short term trend remains bullish, we ran into that resistance almost exactly at that important resistance range between 51.90~52.30. Minor levels on the bounce towards here are 51.55 & 51.91. Either of these areas could cause a pause in the move up. A break below 51.00 signals further losses targeting 50.70~50.60. This could hold initially but I’d be weary of trying longs here as momentum on profit taking could take us down to 50.10~50.00. Now, here is where I technically see the bounce back but all I’d attempt to do while trading this long is a scalping technique, taking profits on short moves. If the bulls get too lazy to hold we’d be looking at giving up that 50-handle to 49.70 and from here downwards signals a short-term sell signal taking us to 49060~49.50 and then 49.15~49.05.

Pivots for Dec 6th, 2016

R3=52.34 | R2=51.77 | R1=51.42 <-> S1=50.72 | S2=50.37 | S3=49.80

WTI Crude Daily Chart Analysis

CL-Daily-12-06-2016.PNG

Analysis with excerpts from a story by Reuters released earlier today

Dec 6th 2016 Updated at 10:23 pm EST on Dec 5th 2016

OPEC has finally agreed to cut production, but only after two years of fruitless negotiations. So what changed to make an agreement possible now, after it had eluded negotiators at previous OPEC meetings?

The common theme in these accounts is the personal intervention of top political leaders, which overcame the obstacles which had stalled negotiations at technical level.

But the context was a change in oil market conditions that made it more attractive for Saudi Arabia and other members of the OPEC to reach a deal. For the first time since 2014, the kingdom can afford to cut output without too much risk that other producers would fill the gap by raising their output in the near term.

The signal for the November 2016 agreement came when Iran was no longer able to increase its oil production further over the summer. Saudi officials have long stated that it would only be possible to reach an OPEC agreement once Iran had normalized its output following the lifting of sanctions.

SAUDI SHIFT

Saudi Arabia, the organization’s most influential member, has been seen as relatively unenthusiastic about a deal until the last few months. But Saudi Arabia’s veteran oil minister Ali al-Naimi, seen as a sceptic, was replaced by Khalid al-Falih in May, who has been more sympathetic to exploring the opportunities for an agreement.

The Saudi economy has also continued to deteriorate, with a substantial increase in unpaid government and business bills, and a further fall in foreign reserves, all of which increased pressure for a deal. And the kingdom’s “Vision 2030” economic transformation program and planned share offering in the national oil company, announced in 2016, both depend for their success on higher oil prices. Saudi Arabia’s willingness to strike a deal shifted at some point between the unsuccessful OPEC meeting held in June 2016 and the successful OPEC meeting held in September 2016. By September, Saudi negotiators went to OPEC’s meeting in Algiers eager to reach a deal and willing to show sufficient flexibility to get one done.

MARKET SHARE

Saudi officials have stated consistently the kingdom will not sacrifice market share to other producers – whether U.S. shale firms, OPEC rivals such as Iran and Iraq, or non-OPEC competitors such as Russia. Saudi officials refused to cut output during 2014 and 2015 for fear that any price increase would simply throw a lifeline to U.S. shale firms and encourage them to raise their production. Since May 2015, however, U.S. oil production has been falling, eliminating one source of competition. Saudi Arabia continued to refuse to cut output during 2015 and the first half of 2016, citing the threat of increased production from Iraq, Iran and Russia. But by the summer of 2016, Iranian output appeared to have reached a temporary plateau following the lifting of sanctions, reducing the threat from that quarter. The main challenge to Saudi market share now comes from Iraq and Russia, both of which have increased their output this year. But Saudi officials may have concluded the scope for further increases in the short term was modest and that an agreement to freeze Iraq’s and Russia’s output around current levels would be viable.

MARKET POWER

Saudi officials have usually assumed, with justification that other OPEC and non-OPEC members will cheat on any production agreement if they can. But sometimes other OPEC and non-OPEC countries are unable to cheat because of war, sanctions, social unrest or lack of investment, which makes deals possible. Between 2014 and 2016, Saudi Arabia had no incentive to cut production because other countries were likely to respond by increasing their own output. Riyadh would have been left with lower output and unchanged or lower prices, resulting in lower revenues. Output cuts were not an optimal strategy for the Saudis. But with Iran’s output apparently peaking in the summer of 2016, opportunities for cheating have become more limited. Most other OPEC members are struggling to maintain current production and have few options to raise output. The main challenge comes from further increases in output from Iraq and Russia, and both countries have agreed to freeze or cut their output under the November agreement. Given output from other sources is now maximized or frozen; Saudi Arabia’s optimal strategy is to reduce output and secure an increase in prices.

SELF INTEREST

Saudi Arabia and its allies only cut output when they are confident other OPEC and non-OPEC members have limited capacity to cheat. These conditions occurred in March 1999 and again in November 2016, which is why Saudi Arabia and its allies have been willing to agree to a production cutting deal. While the current deal contains commitments to production cuts or freezes from other OPEC and non-OPEC members, and a verification mechanism, it does not really depend on them to be effective. From a Saudi perspective, the important consideration is that Iran cannot increase its output much further, and that Iraq and Russia have committed to freezing if not actually reducing their output. In the next year, the main threat to the deal comes from U.S. shale as well as from Iraq and Russia. The deal can survive some degree of “slippage” from shale and other OPEC and non-OPEC producers because consumption is growing, which will help absorb some non-compliance as well as a limited shale revival. But if rival producers start increasing their output significantly, maintaining output cuts will no longer be optimal and Riyadh will adjust its strategy accordingly. Until then, Saudi Arabia is acting in its own interest by cutting production, even if other OPEC and non-OPEC producers fail to follow through fully on their commitments.

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