Oil’s Bearish Retreat Receives No Relief

Market Trends - 21/06/2017

After fanfare stemming from OPEC’s decision to extend output cuts last month, crude oil futures remain under significant pressure, falling into bear market territory on Tuesday after a -2.00% plunge. While it has been difficult to pin down the exact reason for the latest tumble, the prevailing trend lower in crude since the outset of the year suggests that more pain may be in store for oil bulls. Aside from the technical aspects, fundamentally the market is moving closer to another period of imbalance as evidenced by the pickup in production from key regions.

Libya and Nigeria, two OPEC nations given exemptions from participating in the OPEC-led deal, have been adamantly restoring shuttered production over the last few months, with plans to increase output even further. However, apart from rising OPEC production, the US is also contributing to climbing supply. With production following the rig count higher, data from the US Energy Information Administration confirms that this development later in the session could see the recent spate of losses in crude futures accelerate.

While the fundamental outlook is skewed in a primarily bearish direction, oil futures are not without upside risks that could greatly change conditions moving forward. The main item for consideration is the building tensions between Saudi Arabia and Iran. Reports of a thwarted attack against a Saudi offshore oil installation earlier in the week underlined the sense of strain between the two nations despite their intertwined relationship via OPEC.

In addition, the showdown in Syria combined with the sense that Qatar is facing an imminent conflict with its own neighbors could ignite the entire region, potentially constraining supply from the Persian Gulf and causing a global shortage. With market focus aimed at inventory and output data, the absence of attention towards an unfolding geopolitical crisis suggests that investors are growing complacent. As such, ignoring the risk factors could be perilous for oil bears, potentially resulting in a short squeeze higher in prices if cooler heads do not prevail.

 

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