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The History of the Current Oil Crisis and What to Expect Now?

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Crude oil is in bear market territory, down more than 21% from the yearly highs reached on January 1 of this year. So, is this a good buying opportunity or is this the start of a bigger decline? To analyze this in detail, we have to first study the reasons for crude oil’s fall from above $100 per barrel levels in 2014, the subsequent recovery from its lows of under $30 per barrel in early 2016 and the recent gloom that is threatening to push prices back into the $30s per barrel levels again.

Key Points

  • Huge US shale oil boom led excess supply started the current oil crisis
  • Major oil producers depend on oil revenues to fund their fiscal budgets
  • Iran and Saudi Arabian rivalry scuttled the first deal in April 2016
  • OPEC continued to talk prices higher in 2016
  • Crude oil prices skyrocketed on the announcement of the OPEC production deal
  • US crude oil inventory remains stubbornly high even after OPEC production cuts
  • Markets daring OPEC to cut deeper, until then oil will trade with a bearish bias

The US shale oil boom

High crude oil prices in the last decade, barring the plunge during the financial crisis was boom time for the US shale oil sector. As a result, US crude oil production spiked from about 4.8 million barrels per day (bpd) in 2005 to 9.3 million barrels bpd in 2015. Demand growth could not catch up to the supply addition, leading to a glut. Consequently, oil prices began to plunge.

Saudi Arabia had a new competitor in the form of the US shale oil producers. However, estimates by the consultancy firm Wood Mackenzie put the US shale oil ‘break-even price” at around $65-$70 per barrel. Therefore, Saudi Arabia, in 2014, devised a strategy to continue pumping oil in order to retain market share. They wanted prices to fall below the breakeven of shale oil drillers forcing them out of business. As a result, prices plunged from above $100 per barrel in mid-2014 to multi-year lows of about $26 per barrel in February 2016.

Low Oil Prices Hurt Major Oil Producers, Including OPEC

Though Saudi Arabia managed to send a number of US shale oil drillers into bankruptcy, they could not wipe them out completely. With various cost cutting measures, new technology advances, and smart hedging strategies, many US shale oil companies brought their breakeven price down from $70 per barrel to about $40 per barrel.

On the other hand, the major oil producers who were depended on crude oil prices began to suffer, because their fiscal budgets were bleeding. The OPEC nations needed a much higher price for breakeven, as shown in the chart below, hence, the smaller nations began pressurizing Saudi Arabia to cut production to balance the markets.

OPEC Member Fiscal break-even Fiscal deficit(% of GDP) Million barrels per day Spare capacity(% used)
Algeria $96.1 -13.90% 1.11 2.64%
Angola $110 -3.50 1.79 2.22%
Ecuador n/a -5.10% 0.53 5.26%
Iran $87.2 -2.90% 2.88 20.83%
Iraq $81 -23.1% 4.2 6.94%
Kuwait $49.1 1.20% 2.73 1.42%
Libya $269.00 -79.10% 0.43 20.00%
Nigeria $122.70 -2.80% 1.9 6.77%
Qatar $55.50 4.5% 0.67 5.71%
Saudi Arabia $106.60 -21.60% 10.25 17.13%
UAE $72.60 -5.50% 2.89 2.04%
Venezuela $117.50 -24.40% 2.38 3.21%

Table sourced from CNBC

Saudi Arabia and Russia Announce Production Freeze in February 2016

Saudi Arabia was also struggling with prices stuck between $40-$60 per barrel. Hence, on February 2016, Russia and Saudi Arabia announced an agreement to freeze production. This put a bottom in place and crude oil prices rallied from the lows. The announcement couldn’t have come at a better time as WTI crude oil had hit a multi-year low of $26.05 per barrel on 11 February 2016.

Oil markets were further encouraged when the other OPEC members and non-OPEC producers agreed to meet in Doha on April 2016 to ink a deal on production freeze.

Saudi Arabia and Iran Tensions Scuttle a Deal in Doha on 17 April 2016

Saudi Arabia and Iran have been at loggerheads with each other since the Iranian Revolution in 1979. Though both nations are ruled by the Islamic scriptures, Saudi Arabia is Sunni dominated, whereas, Iran is a Shia majority.

Both want to be seen as the torch bearers of the Islamic world, hence they are in confrontation with each other to establish regional supremacy. Both these nations are on the opposing sides in the two ongoing conflicts in Syria and Yemen.

During the Doha meeting, Saudi Arabia stressed Iran also to commit to a production freeze. However, Iran – which was allowed to sell its oil only in January 2016 after the Western world partially lifted the sanctions – was adamant to increase its production to pre-sanction levels before even considering any production freeze.

Saudi Arabia’s tough stance was attributed to its then Deputy Crown Prince Mohammed bin Salman, who is known loathe Iran. The meeting ended without a result.

Between April and November, the oil markets remained in a range with hopes alive that OPEC and Russia will arrive at a deal to limit production to balance the markets. Whenever oil prices fell, OPEC kept propping prices higher talking about a possible production deal.

OPEC and Non-OPEC Reach a Deal on November 30

After months of deliberations and negotiations, OPEC finally agreed to cut production by 1.2 million bpd – first production cut in eight years – on November 30. However, Nigeria and Libya were exempt from the deal, while Iran was asked to only freeze production – at slightly higher levels than its October production – rather than cut. Saudi Arabia, the largest OPEC producer agreed to cut 0.5 million bpd, Lion’s share of the total 1.2 million bpd planned. Crude oil prices rallied over 10% following the announcement of the deal. Oil further received a boost when Russia also joined the deal and both the OPEC and non-OPEC producers agreed to cut 1.8 million barrels of oil.

Crude Oil Prices Remained close to $50 per barrel Following the Deal

History says that OPEC members cheat and report false numbers during production cuts. Hence, the analysts were skeptical of the success of the deal this time. Nevertheless, as reports emerged of a high level of compliance by the OPEC members, oil markets were further encouraged that the supply glut will reduce.

However, the US shale oil drillers had other plans. They had been increasing production and adding oil rigs taking advantage of high oil prices. They once again proved that the balance of the oil markets had changed.

The mantle of ‘Swing Producer’ – a large producer increasing or decreasing production in order to keep the oil markets balanced – was not with Saudi Arabia alone. Due to the short time needed to stop or start production, the nimble footed US shale oil producers were equally capable of increasing or decreasing production.

US oil production hit a low of 8.42 million bpd in the first week of July 2016, from the peak of 9.61 million bpd in June 2015. That was a drop of about 12.38% in about 13 months. However, as crude oil prices rallied to $50 per barrels, US crude oil production started to recover quickly – much faster than analysts expected. By the week ending 16 June 2017, US oil production has again bounced back to 9.35 million bpd. Analysts are now predicting US crude oil production to reach 10 million bpd by the end of this year.

The US crude oil inventory has remained stubbornly high. At 509.1 million barrels – as on 16 June 2017 – it is ruling close to the lifetime highs of 533.97 million barrels, well above the five-year average. Thus, the crude oil traders have lost hope that the current production deal is enough to rebalance the markets in the wake of rising US, Libyan and Nigerian crude oil production. Therefore, crude oil prices started falling and are threatening to go below the $42 per barrel levels.

The Oil Production Deal is in Danger of falling apart

Though OPEC and Russia agreed to extend the deal until March 2018, the recent elevation of Mohammed bin Salman as the crown prince of Saudi Arabia is likely to flare middle east tensions, which is already on the rise after Saudi Arabia and its allies broke diplomatic ties with Qatar recently.

Additionally, the frustration of falling crude oil prices when OPEC members are either freezing or cutting production will increase calls for Nigeria and Libya to be bound by a limit. Similarly, Saudi Arabia, under the new crown prince is likely to pressure Iran to cut production. If the above happens, the deal is likely to fall apart.

So, What is the Future of Crude Oil Prices?

Along with demand and supply, crude oil prices are also determined by the underlying sentiment. Currently, the sentiment is running weak as the analysts are not confident that the supply cut can be reduced without some drastic measures. Hence, until the OPEC springs some surprise, crude oil prices are likely to remain range bound with a bearish bias, keeping an eye on the US oil production and another of the US crude oil inventory data.

Featured image from Shutterstock

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.7 stars on average, based on 9 rated postsRakesh Upadhyay is a Technical Analyst and Portfolio Consultant for The Summit Group. He has more than a decade of experience as a private trader. His philosophy is to use technical analysis for momentum trading and fundamental analysis for long-term positions. Rakesh likes to keep himself fit by lifting weights and considers himself to be a spiritual person.




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Analysis

Crypto Update: Divergence Deepens as Altcoins Fall, Bitcoin Flat

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The unusual discrepancy between BTC and the rest of the cryptocurrency market continued today, with the top 10 coins all losing ground with the exception of Bitcoin itself. Tuesday’s surge, which carried the segment to $300 billion in total market cap quickly fizzled out, at least as far as the major altcoins are concerned, but the largest digital currency is still holding on above the strong $7000 and $7350 support/resistance levels.

Altcoins are on short-term sell signals according to our trend model, but Bitcoin is still on a buy signal as the declining trend was broken by the break-out that remains intact, despite the segment-wide weakness.

Given the mixed, but one-sided setup, and the lack of bullish follow-through, odds still favor a bearish outcome, and traders should remain cautious with new positions here, even in BTC, the positive outlier. A broad trend change would require a meaningful leadership, and until that develops, a test of t eh June lows remains likely, with the possibility of new lows in the coming week as well.

BTC/USD, 4-Hour Chart Analysis

While Bitcoin failed to durably stay above the $7500 level, bulls successfully defended the support zone near $7350, despite the overbought short-term momentum readings. The coin is well above the line-in-the-sand $7000 level and the long-term support near $5850 that was in danger just one week ago.

Although the altcoin weakness makes BTC’s rally suspicious, the short-term bullish pattern is intact, as is the buy signal in our trend model. Further support is found at $6750, and $6500, while primary resistance is still ahead at $7650.

Selling Pressure Apparent in Altcoins

ETH/USD, 4-Hour Chart Analysis

All intraday rally attempts have been sold so far in most of the major altcoins, and Ethereum is just holding up above primary support at $450 despite the rally in the beginning of the week. The coin is on a short-term sell signal, and a test of the June lows is likely after the failed break-out. Strong resistance is ahead at $500 and between $555 and $575, while support is found at $420, $400, $380, and $360.

XMR/USDT, 4-Hour Chart Analysis

While Monero has been holding up relatively well in the last couple of days after getting stuck below the $150 level during the Tuesday surge, but the coin is still among the structurally weak majors, being on a long-term sell signal. As the other bearish leaders, NEO, LTC, and Dash are also trading below key long-term levels, we expect the coin to fall back below the $125 support and likely test the June lows in the coming weeks.

XRP/USDT, 4-Hour Chart Analysis

The third largest coin Ripple is already testing the $0.45 level after drifting lower ever since the Tuesday rally, and as its relative weakness is still clear, a break below that level seems to be imminent. Below that, the crucial long-term support zone near $0.42 could stop the decline of XRP again, but a move under that could trigger a long-term sell signal.

Featured image from Shutterstock

Disclaimer:  The analyst owns cryptocurrencies. He holds investment positions in the coins, but doesn’t engage in short-term or day-trading, nor does he hold short positions on any of the coins.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.6 stars on average, based on 297 rated postsTrader and financial analyst, with 10 years of experience in the field. An expert in technical analysis and risk management, but also an avid practitioner of value investment and passive strategies, with a passion towards anything that is connected to the market.




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Analysis

Forex Update: Boring Means Long-Term Sustainability for EUR/INR

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Billionaire investor George Soros once said, “If investing is entertaining, if you’re having fun, you’re probably not making any money. Good investing is boring.” As an experienced investor, I couldn’t agree more. There’s a lot of waiting and sitting involved but that’s how money is made in investing. The Euro/Indian Rupee (EUR/INR) pair seems to be the perfect embodiment of this quote.

Looking as far back as 1999, it appears that EUR/INR has been in an unstoppable bull run since the second half of 2002. If you invested in the pair a decade and a half ago, you would have more than doubled your money. Chances are you didn’t, but don’t fret because you can always invest today. EUR/INR looks as strong today as it did back then.

In this article, we show how EUR/INR is looking strong on all counts despite being boring.

Healthy Ascending Channel on the Daily Chart  

EUR/INR dropped to as low as 67.9819 on April 10, 2017 and it was nothing but blue skies since. It is trading within an ascending channel as it generates higher highs and higher lows in a sustainable manner. The ascending channel looks healthy, too, as the trading range is not significantly contracting or expanding.


Daily chart of EUR/INR

If you look at the technical indicators, everything is fairly clear. EUR/INR rallies when it flashes oversold readings. On the other hand, it corrects when it is overbought. You won’t find excitement here and that’s good news for long term investors.

Concluded Corrective Wave on the Weekly

EUR/INR started showing signs of weakness in September 2013 when it posted a shooting star weekly candle. The ensuing pullback drove the pair down to the 65 levels in March 2015 (A-wave). The market has not visited that price area since. It managed to generate a bullish higher low setup at 68 (C-wave). This was a clear signal to investors that the correction was over.

Weekly chart of EUR/INR

With a higher low in place, EUR/INR took out resistance of 76. The new support level was tested and retested before the pair mounted a strong rally. On top of that, we can see a hidden bullish divergence on the weekly RSI, hinting that the uptrend is in a good shape.

Even in the weekly chart, the market is not pulling any surprises. There are no false breaks and no shakedowns. You don’t have to look close to see where the market is headed. EUR/INR is boring and that’s why it is strong.

Major Support Line on the Monthly Intact

Conventional wisdom says to buy low and sell high. The problem with this is that you don’t really know when is the market low. The market can go down as there’s always the possibility that a key support can break. That’s just not the case for EUR/INR.

Monthly chart of EUR/INR

Buying low is fairly simple in this case. All investors have to do is to wait for the price to hit the long-term support. Investors can be confident in doing so because the trend line has been intact for over 15 years. More importantly, it bounces every time it hit the support. It’s not really exciting but it works.

Bottom Line

A famous billionaire trader once said that good investing is boring, and I agree. Look at the charts of EUR/INR and you’ll see why boring investing is good.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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3.6 stars on average, based on 201 rated postsKiril is a financial professional with 4+ years of experience in financial writing, analysis and product ownership. He has passed all three CFA exams on first attempt and has a bachelor's degree with a specialty in finance. Kiril’s current focus is on cryptocurrencies and ETFs, as he does his own crypto research and is the subject matter expert at ETFdb.com. He also has his personal website, InvestorAcademy.org where he teaches people about the basics of investing. His ultimate goal is to help people with limited knowledge of finance and investments to create investment portfolios easily, and in line with their unique circumstances.




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Pre-Market: China Tries to Support Markets as Global Stocks Slide

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Yesterday’s risk-off shift continued today in early trading with nervous and choppy trading in Asia and Europe, as global financial markets are still haunted by trade war fears and emerging market weakness. The major US indices rolled over after another period of apparent relative strength, with the Nasdaq being the most robust market once again, while most of the key European benchmarks continue to lag behind.

S&P 500 Futures, 4-Hour Chart Analysis

Chinese assets are still in focus before the weekend, as the Yuan’s recent steep devaluation sparked fears of a credit meltdown in the country. With the largest credit bubble in human history casting its shadow on China, some analysts think that with Trump’s trade war, the bug finally found its windshield and the bubble already started to burst.

USD/Yuan, 4-Hour Chart Analysis

All eyes are on the USD/Yuan pair as Chinese authorities are reportedly intervening in the market of the currency, and most likely local equities as well, trying to prevent a serious run on the most important assets.

With the Chinese stock market already in a bear market, and the Yuan trading at fresh 12-month lows against the Dollar, it might be a bit late to stop the slide, but the intervention could cause spectacular short squeezes.

Italy also made headlines today during the European session, as Italian government bonds got slammed lower, as the future of the new finance minister is uncertain, with another round of political turmoil possibly ahead for Europe’s most vulnerable country.

Unicredit (UCG), 4-Hour Chart Analysis

Looking at the charts of Italian banks, it’s clear that the spring turmoil had a lasting effect on the financial system, as Unicredit is on the verge of hitting a new low, and the other large players also remain under pressure, in part explaining the general weakness in European equities.

Europe Still Far Behind amid Mixed Economic Numbers

USD/CAD, 4-Hour Chart Analysis

The economic calendar is almost empty today with regards to the key markets, as the Canadian Retail Sales and CPI reports are the most important releases. The Canadian Dollar rebounded when the USD entered a correction June, but now the currency edging lower again, as the weakness in commodities and the Greenback’s rally are taking their toll. New highs are likely in the USD/CAD pair in the coming weeks, although strong resistance is just ahead at 1.33.

Commodities are little changed today after yesterday’s volatile session, as the bounce in China helped to stabilize the segment. Notably copper is back above the key $2.70 level, while WTI crude oil is trading at $68 per barrel again, and gold is hovering around $1225.

Featured image from Shutterstock

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.6 stars on average, based on 297 rated postsTrader and financial analyst, with 10 years of experience in the field. An expert in technical analysis and risk management, but also an avid practitioner of value investment and passive strategies, with a passion towards anything that is connected to the market.




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