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Has crude oil found support after a spectacular 30% fall in just 6 weeks?

Oil prices have been extremely volatile in recent weeks with crude hitting $52.80 just 6 weeks after peaking at $77 last month. Tuesday’s fall of over 7% was among the sharpest one day falls in recent years and indicative of increased volatility in the oil price. There appear to be a multitude of factors in play causing market disruption. Weekly inventory numbers, dollar strength, the threat of a global recession, and politics are all playing their part. In particular the US/Saudi Arabia relationship and cries for lower oil prices from Donald Trump have been a recent focus.

This week, Trump declared just how strong he values the USA’s relationship with Saudi Arabia, stating he is ‘putting America first’ by ensuring a $450billion arms deal with the Saudis stays on track despite the controversy of the Khashoggi killing. He’s also made it abundantly clear on numerous occasions that he wants lower oil prices, today tweeting “Oil prices getting lower. Great! Like a big Tax Cut for America and the World. Enjoy! $54, was just $82. Thank you to Saudi Arabia, but let’s go lower!”

Saudi Arabia had upped its output slightly to offset a drop in Iranian production due to US imposed sanctions on the country. However, recent reports of a growing surplus evidenced by a series of significant reported builds in US crude inventories have given the market the jitters. Hedge funds have been offloading long positions for much of the summer as the hype of $100 oil started to build, concluding in a very strong selloff from highs of $77 last month.

The majority following the sector focus on the widely publicised weekly reports from the US Energy Information Administration (EIA) and to a lesser extent the American Petroleum Institute (API) report that precedes it each week. These figures are arguably the most influential with regard to sentiment and the oil price yet only give part of the picture, and certainly don’t give clear visibility to world inventory levels. When the US elects to import more oil at a particular time, a skewed impression of increasing inventories can be the result.

World demand for oil is set to continue to grow in years to come and although at present supply needs to be carefully balanced, there isn’t an overwhelming amount of additional capacity available. As the biggest producers on the world stage, neither the USA nor Saudi Arabia will want oil prices to collapse.

US production is at an all-time high however the Saudi’s have started to reduce exports to the US which should start to drive US crude inventories down. China has also been destocking its inventories with a reduction in imports over the past three months.

Funds In Neutral Gear

WTI crude dropped more than 30% from nearly $77 down to $52.80 in a mere 6 weeks, with Brent crude in a similar position since it peaked at $86 last month. And it’s easy to see why – Hedge funds closed out their remaining longs, and as you can see from the chart below, now hold a neutral position.

A look at the spot price charts shows crude is currently more oversold than at the beginning of 2016 when the oil market capitulated.  Having dipped by over 7% yesterday, crude is now up by 4% today. We will have to wait and see if this is a sustained bounce from an area of support around $52.50.

A move above $58 will see oil back in the upward trend channel it has been occupying since early 2016. Following this, he next key resistance zone to tackle will be $62. If broken the next target area would be $64/$65. OPEC are to meet in Vienna on the 6th December to discuss balancing the market. Following last Sunday’s discussions, OPEC Secretary General Mohammed Barkindo said the group remains focused on efforts to “restore stability” in the oil market. Anticipation ahead of this meeting may drive oil prices upward. The strong bounce yesterday did bode well for some level of recovery from here but much depends on the outcome of the OPEC meeting in 2 weeks, the wider macro economy, and of course comments from Trump.

Author: Stuart Langelaan

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