Crude Oil Conundrum

Intermediate
  • Saudi Arabia and Russia agreed to extend their oil restrictions
  • The oil price was pushed higher over U.S. – Iran tensions
  • The level of U.S. production means America does not need to engage in the Arabian Gulf
  • Target WTI down to 56.39

The Saudi Arabian Energy Minister, Khalid al-Falih said on Saturday, June 29, 2019 that is an agreement forged between the Russian and Saudi leaders during sidelines discussions of the G20 meeting. They are to extend the “OPEC+” oil supply cut agreement from July by six to nine months would help reduce global inventories and restore balance the oil markets at a time when oil prices come have been under renewed pressure from rising U.S. supplies and a slowing global economy.

Despite the technical outlook being dominated by “SELL” signals the vie among analysts is mixed. For example, Anna Coulling suggests that despite the fear of looming resistance points at 59.93 the oil price has in general been pressing higher.

There was a gap up open of Wednesday which saw oil push higher on excellent volume. This allowed a resistance to be taken out and it now acts as a platform of support in the $58 per barrel region. Anna suggests that WTI is poised to climb toward 61.00…62.40 and then 67 even.

I find it hard to agree with the view. I say this as oil has been supported by the fear of tension between the U.S. and Iran. That does seem to have cooled in recent days, although one may say that is just because President Trump was more interested in photo opportunities at the G20 and in the Korean “DMZ”.

That is too glib, as the U.S. does not need to police the Strait of Hormuz anymore because it no longer depends on imports from the region. U.S. Persian Gulf imports have slipped from 16% of consumption in 2012 to less than 10% last year.  The 2018 average consumption was more than 20 million bpd; imports from the Persian Gulf hovered around 1.5 million bpd in Q£ 2018.

WTI Crude Oil August 2019 One-Month

Driving this shift was rising shale oil production that has made the U.S. the largest producer of oil in the world last year but, more importantly, far more self-sufficient in the oil department.

The U.S. imported four times as much oil from Canada as it did from the Persian Gulf in that month and this will likely continue as refineries on the coast of the Gulf of Mexico need heavy crude and they can easily get it from Canada rather than ship it from the Middle East.

What this means is that the U.S. is pretty much immune from Strait of Hormuz supply disruptions. Similarly, any Saudi-Russian oil pact simply ignites a chain of events…prices move higher…U.S. shale output increases…prices move lower.

Summary:

Sell WTI at opening

Target 1 56.39

Stop at 60.00

Stephen Pope

Macroeconomic Strategist

Stephen Pope is the Managing Partner of Spotlight Group. He has worked in the world of finance since 1982 and has performed d...continued

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