OPEC’s report confirms already known details but also prepares for new volatility

Fundamental Analysis:

Yesterday, Monday the 14th of May, the monthly OPEC report was released giving us some valuable insights as to where the Oil market stands at the moment and were it could be heading.

To start with, for 2018, oil demand growth is estimated to surge by around 1.65 million BPD to average 98.85 million BPD . Growth was adjusted higher by 25 tb/d measured against last month’s valuation. Furthermore, it was made clear that strong compliance of the agreement by OPEC and participating non-OPEC nations in respect of production adjustments through the combined effort, also continue to support the oil market. In other words, the Russia OPEC cooperation is carried out swiftly and goals are executed as planned. In the report, it was also confirmed that crude oil imports increased in various parts of the world. In more detail, Japan’s crude oil imports increased in March by 8% and China’s crude oil imports increased in March by 10%, from the previous month, marking the second highest level for imports on record. On the other hand, Venezuela, whose output has dropped significantly due to an economic crisis, told OPEC its production fell to 1.5 million BPD in April, considered to be the lowest in decades.

Moreover, OPEC’s May report made a short commentary regarding the fast growing US tight oil production. It was said that tight oil is related to costly logistical constraints as they were named and pressures are arising from shareholders demanding return on their investments since profits are most probably in excess.

On a separate note, last week the U.S. reached the decision to withdraw from the international nuclear deal with OPEC member Iran and to renew sanctions. This fact has raised concerns about Iranian oil exports, because it may have the effect of inflating oil prices to artificial levels. OPEC was quick to respond stating they and their allies were ready to take action if geopolitical developments impact supply. We also stand by the opinion that Saudi Arabia has power and influence to jump in and cover for any shortage created. However, it is possible they will not act alone.

From a trading perspective, hedge funds persist on cutting their bullish positions in petroleum regardless of the continued increase in prices and the prospect of renewed sanctions reducing exports from Iran. Fund managers appear to be profit taking after a strong rally in crude oil rather than adding new positions. In our opinion, Oil prices have a great potential of moving even higher supported fundamentally but also technically. However, the black golds advancement since the start of 2018 has been so smooth that it’s hard for investors to keep their money in the market and at risk of reducing their profits. Positive cash flows are almost always accompanied by significant withdrawals and the Oil market has been a bull runner backing the pre mentioned statement.

As a conclusion, while fundamentals still appear supportive, higher oil prices have the potential of holding back consumption growth and stimulate more supply in the second half of 2018 and into 2019.


Technical Analysis:

Crude oil has been moving in a sideways movement between the 71.50 Resistance Level and the 70.50 Support level. Both these levels have been tested several times and have shown strength keeping in mind they are 3.5 year high levels.

The RSI indicator for the 4 hour chart is at approximately 50 and maybe indicating a mixed up sentiment as prices are already very close to our 71.50 resistance level.

If the market is overtaken by a bearish movement we may see crude oil dropping towards the 70.50 support level and even breaching it stabilizing somewhere near the 69.00 Support hurdle.

On the flip side if market participants decision is to purchase the commodity there could be a break of the 71.50 resistance level and move even higher aiming for the 72.50 Resistance level.