Oil Production Surges

Daily Analysis - 21/04/2015

Supply Expansion Continues as OPEC Members Widely Exceed Output Quotas

Adding to energy market woes, Saudi Arabia continues to maintain output at near record levels with production expanding in certain key markets. The unbalanced nature of global oil fundamentals continues to diverge from prices as peak storage capacity is nearly reached.

Saudis Maintain Output

In comments yesterday, Saudi Arabian Oil Minister al-Naimi noted that the nation would maintain oil output at near record highs, temporarily sending oil prices lower before rebounding modestly. The latest gains in production coupled with additional production coming online from Iraq and Libya are seeing OPEC output continue to rise beyond quotas set by the cartel. American production has not waned as much as previously thought, only falling by 20,000 barrels last week despite the continued drop in the drill rig count. Production is forecast to fall in the United States according to the latest EIA predictions however, Bakken tight oil could actually grow to a new record as drillers are incentivized to complete wells within one year for tax benefits. Pressure on prices continues to be offset by building long speculative positions. The spread between WTI and Brent has closed to just over $5.50 and could close further as production ramps higher.

Greece Implements First Capital Controls

The latest measures taken by the Greek Government to meet upcoming loan repayment obligations has been met with substantial outrage after decreeing that local governments would have to transfer reserves to the nation’s Central Bank. The funds will likely be used in an effort to roll short-term debt and repay IMF borrowings. The IMF has come out staunchly against Greece missing any payments despite the fact that the nation is broke and seeking leniency from its creditors. Creditor intransigence and unwillingness to comprise is bringing the country ever closer to the brink of default and wider chaos with the Government already struggling to control the dialogue. The latest confiscation highlights increasingly desperate policy measures being implemented to stave off the inevitable. Despite Mario Draghi’s verbal warnings, the Euro has resumed the move lower against peers, taking out key support levels against major peers.

Dollar Rebound Sends Metals Lower

The dollar gained ground against peers as the absence of economic data and remarks from New York Federal Reserve President Bill Dudley sent the currency higher. Responding to questions about the impact on emerging markets of any rate increases, Dudley confirmed the Federal Reserve’s outlook for raising rates in 2015 while stating that the Fed would seek to moderate any increase to avoid turmoil or liquidity disruptions. Further to the point, hidden towards the end of his explanations was a statement that interest rates will be approximately 3.50% by the time inflation returns to the long-term target of 2.00%. Even though the Fed’s projected trajectory is 1.875% by the end of 2016, economists and market participants are expecting interest rates at half that level. The rally in the dollar saw precious metals resume their slide lower, with gold falling back below the key $1200 level and silver completing the right shoulder of the technical pattern.

EURCHF Equidistant Channel Technical Pattern

Although the Euro has seen pressure from short-sellers abate marginally over the last week, the common currency continues to give up ground against peers as the combination of quantitative easing and Grexit fears weigh heavily on the outlook. Meanwhile, the Swiss Franc continues to experience inflows despite the soft exchange rate targeted by the Swiss National Bank. The downward trending equidistant channel formation in the EURCHF has a bearish bias as investors continue to prefer safety and negative interest rates versus the risks in the Euro. The prevailing strategy is to initiate short positions at the upper channel line with the lower channel line as the target. Fighting the trend with long positions sees risk increase while potential reward decreases.