Wednesday , June 16 2021

Crude oil: Will crude's slump end? Here's where you can look for clues

By Dan Murtaugh, Serene Cheong, Ann Koh and Sharon Cho

Oil's record losing streak has plunged prices into a bear market and is reverberating around the globe.

As they seek answers to what's in store for prices, they may well watch these potential flashpoints for crude on future.

Supply Standoff

The U.S. Decision to grant waivers will allow importers of Iranian oil to keep buying in spite of sanctions confounded expectations of a looming supply crunch, helping trigger crude's collapse.

While OPEC and its allies have been pumping more in anticipation of Iran's exports falling to zero, de facto group leader Saudi Arabia says it will reverse the increase in output this year.

President Donald Trump has tweeted that they should not cut production, setting up a standoff between the U.S. administration and OPEC before it meets in Vienna on Dec. 6. Will the Saudis still push for cuts and will its allies fall in line? Or will the risk of Trump's ire persuade them to desist?

Investors should also keep an eye on shale fields in the U.S., where drillers have continued to increase the number of drilling rigs. Companies usually set capital spending plans in the months ahead, and production comes in months after the drilling begins, so the gains in America's output – already at record levels – may continue to have tailwinds for the near future.

Greenback Gains

The dollar rose this week to the strongest level in 18 months against a basket of foreign currencies. Since oil is traded worldwide in the U.S. currency, it's made petroleum pricier for emerging economies to buy in local denominations. While global benchmark Brent crude is priced in the greenback, it's still up 11 percent in Indian rupees and 14 percent in Brazilian reals. That's weighing on demand.


The dollar could get even more support next month if the U.S. Federal Reserve raises interest rates to an economy with the lowest unemployment rate since the 1960s. The Fed is likely to increase the federal funds rate by more than 75 percent.

Refining Returns

In a worrying sign for demand, profits from processing crude into fuel for cars have plunged to their lowest level for at least three years, followed by the peak summer driving season. Poorer returns from making gasoline that weighed on lighter crudes like Brent that yields a higher proportion of such petroleum products, as incentive for refining weakens.


To be sure, Asian refiners enjoyed healthy margins for diesel ahead of colder months and more industrial activity in China, which has a record amount of crude last month and is boosting stimulus measures to cushion the impact of the U.S. That's where the Brent's shrinking premium over heavier and more sulfurous Dubai oil, which is the lowest in 15 months.


Some of the pressure on refiners is coming from weakness in the petrochemical sector, which accounts for 12 percent of global crude demand. Asian producers of ethylene, one of the key building blocks used to manufacture everything from plastic to toys, are being squeezed by new U.S. plants that use ethane, a by-product of shale gas, instead of oil-derived naphtha.


The petrochemical sector is also feeling the heat from the U.S.-China trade war. Utilization rates at factories in the Asian nations producing polyester are slowing amid uncertainty over further imports of Chinese textiles, according to Tracey Zhou, a senior consultant at Wood Mackenzie Ltd. in Shanghai.

Fund Fallout

Hedge funds have slashed their net-long positions on crude in New York to September 2017, extending a decline for nine straight weeks. Bullish bets for American barrels have fallen more than 65 percent since January, when they reached a record high, as fears of a domestic stock glitter and higher stockpiles spooked money managers. A reversal could be a sign of broader investor confidence re-emerging in crude.


Technical Targets

ICE Brent crude in London settled below its lower Bollinger Band this week after breaching a key 50 percent Fibonacci retracement support level in early November. The 14-day Relative Strength Index, meanwhile, stood at its lowest level in more than three years as the global marker sank deeper into "oversold" territory.


A sudden u-turn in prices, however, is not expected to be around the corner of an analysis of Bollinger bandwidths. The gap currently stands at its widest in almost two years – backed by high levels of price – indicating the likelihood of lower volatility in coming sessions.

West Texas Intermediate oil was changed at $ 55.74 a barrel at 10:29 a.m. in London after falling in each of the previous 12 sessions, a record losing streak. Brent crude was $ 65.89 a barrel, over 20 percent lower than in early October.

Source link