Market Analysis

Crude Oil: Digesting OPEC decision to cut 1.2 million barrels per day

Fear of rising crude supplies pushed oil prices down 30% over the past two months, which led to the decision from Organization of the Petroleum Exporting Countries (OPEC) to cut crude supply by 1.2 million barrels per day (Bpd) on its December meeting.

Investors digest OPEC decision however looks like they were clearly unenthusiastic by that decision, although they weren’t too frustrated either given that some oil ministers had talked up the prospects of a no-cut in the days leading up to the OPEC meeting, while US President Donald Trump was also applying pressure on Saudi not to cut.

Adding pressure to the market was Russia’s slower-than-expected planned cuts in production, it planned to cut oil output by just 50,000 to 60,000 bpd in January, as it gradually builds to an agreed cut of 220,000 bpd.

Meanwhile, crude oil is roughly unchanged from just prior to the OPEC agreement as the market is apparently expressing concerns over an indicated slow start to Russia’s output reductions next month.

Other analysts noted the reduction by the OPEC and allies, like Russia, may not be deep enough to restore balance to the market especially after the US government confirmed its forecast that the United States would end this year as the new top producing nation.

American Petroleum Institute (API) reported yesterday its weekly statistical bulletin (WSB), which revealed a drop to -10.180 million in crude oil stocks compared to last week number of 5.360 million barrels. This sharp fall may suggest a rise in demand, which might drive the oil price to push upward.

In the meantime, markets remain cautious on the US Energy Information Administration (EIA) report on crude inventories due today, following last week’s number of -7.323 million barrels. Today, we will have the release of EIA latest survey the report and is expected to show a rise in crude oil stocks with estimates at -2.990 million barrels. If the decline in crude inventories is less than expected, it implies weaker demand and is negative for crude prices.

The API data is often seen as a prelude to the EIA data, as it is released the evening before the EIA report. There is definitely a relationship between the two data sets: 80% of the time the data is directionally aligned.

Meanwhile, according to the last data from energy Services Company Baker Hughes released on December 7th, the average number of US oil-drilling rigs fell to 877 comparing to the 887 released on November 30th. This rig count is an important business indicator for the oil drilling industry and acts as a leading indicator of demand for oil products.

Since the beginning of 2018 until last Tuesday close, the crude oil remains negative with a loss of more than 13.5% but since the start of December dropped almost 1.0%. Nonetheless, the weekly outlook remains with a minor loss of 0.33% and on the daily basis, the commodity closed well in the green with almost 2.0% gain. Furthermore, crude oil remains in a bearish phase since late-October.

On yesterday session, crude oil rallied with a narrow range and closed near the high of the day, however, managed to close within Mondays’ range, which suggests being slightly on the bullish side of neutral.

The stochastic is showing a weak bullish momentum although is still below the 50 midline.

Since crude oil made a new year-to-date low at 49.40 in late November, it has been in a sideways consolidation, ranging between 2016 high at 54.47 down to a daily support at 50.90. Seems like the investors are digesting the OPEC meeting output cut resolution. A break above this trading range would project the crude oil price to 58.08 although if it breaks to the downside, the next support seems to be at 46.08.

LCrude is a CFD written over Light Crude futures.


LCrude Jan ’19 Daily Candlestick Chart

LCrude Jan ’19 Daily Candlestick Chart


Watch out this Week: 

Friday at 13:00 GMT (8:00 AM ET): The Baker Hughes will release weekly data on the US oil rig count. An increase in the oil rig count is seen as having a potential negative impact on crude oil price because it is perceived as a likely increase in crude oil inventories if demand does not pick up.


Written by Hugo O’Neill, External Analyst


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