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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: Bitcoin Touched $4000 as Broad Rally Continues

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Yesterday’s break-out to new short-term highs continued today in the cryptocurrency segment, with Bitcoin’s push towards the $4000 making headlines in the segment. The most valuable coin surged past the $3850 level, dragging most of the majors higher, but Ethereum and most of yesterday’s leaders lagged behind BTC during today’s session.

That said, the short-term trend remains positive in case of the majority of the coins, and even though some of the top currencies are overbought, the counter-trend move could continue. In light of the increased activity, trading volumes, and volatility in the market, the majors might be in for a more sustained bullish, move, and as now only Ripple is showing clear signs of relative weakness, despite today’s rally, the leadership of the short-term move looks healthy.

While the long-term picture is still clearly negative in the segment, until the newly established short-term uptrends remain intact, traders could still play the move, sticking to strict risk management rules and relatively small position sizes.

BTC/USD, 4-Hour Chart Analysis

While Bitcoin left behind the initial resistance level near $3850, and quickly rallied up to the strong longer-term zone between $4000 and $4050, it might need to consolidate before another push higher. BTC is slightly overbought from a short-term perspective, and given the significance of the resistance, traders could exit a part of their positions here.

The $4000-$4050 zone stopped the year-end rally (outside of a brief, failed break-out), and a move above it could open up the road towards the $4250 and the crucial $4450 levels. Below $3850, further support is found near $3600 and just above $3450, and our trend model remains on a short-term buy signal and long-term sell signal.

ETH/USD, 4-Hour Chart Analysis

Ethereum continues to trade near the $145 resistance level following yesterday’s surge, and bulls are still eyeing a test of the next major resistance zone near $160, which marked the top of the previous counter-trend move in the coin.

While the coin is still overbought form a short-term perspective, given the momentum if its recent move, the rally could continue after a brief consolidation period. The newly-established uptrend is intact in ETH, and traders could enter new positions should the overbought readings got cleared, with support levels found near $130 and $112.

XRP/USDT, 4-Hour Chart Analysis

Although Ripple continues to be relatively weak compared its major peers, today it spiked to a new 5-week high, riding the market-wide trend and testing a strong declining trendline in the process. The coin triggered a short-term buy signal in our trend model by topping its January swing high, but given its relative weakness, traders should focus on the more bullish coins during the current counter-trend move.

The long-term setup remains negative, and from a broader perspective, odds still favor the test of the key long-term $0.28 and $0.26 levels, with further support levels found near $0.32 and $0.30, and with short-term targets being ahead near $0.3550, and $$0.3750.

EOS Continues to Lead but Litecoin Struggles to Gain Ground

LTC/USD, 4-Hour Chart Analysis

LTC continues to trade slightly above last week’s highs but compared to the leaders of the current leg of the rally it remained relatively weak today. With that and the still negative long-term setup in mind, traders should exit a part of their positions here, even as the short-term uptrend is intact and a push towards the next major resistance level near $51 is still possible. Our trend model is still on a buy signal, as a failed break-out is not yet confirmed, with support levels still found near $44, $38, and $34.50.

EOS/USD, 4-Hour Chart Analysis

EOS remained relatively strong today, spiking above the $3.80 level after leaving behind the $3.50 resistance. Now, the coin is clearly overbought from a short-term perspective, and that led to a downgrade in our trend model as a pullback is now likely.

The short-term trend remains bullish despite the correction risks, and should the coin clear the overbought momentum readings traders could reenter their position following strict risk management rules. Support is now found near $3.50, $3, and $2,80 while strong resistance is ahead near $4.50 and $5.

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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4.7 stars on average, based on 466 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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Altcoins

XRP Price Analysis: Explosive Breakout from Pennant Confirmed; SBI Holdings CEO Bullish on XRP

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  • XRP/USD is enjoying three consecutive sessions of gains, having jumped around 17%.
  • SBI Holdings CEO believes XRP market capitalization will be higher than bitcoin’s.

Ripple’s XRP price has been enjoying a decent move to the north over the past few sessions, as life flows back into the bulls. XRP/USD is currently running at a third consecutive session in the green, having gained around 17% within this period. The explosion of buying pressure came after the price managed to escape a bullish pennant pattern.

XRP/USD: Price Recap

XRP/USD had initially been cooling since the big bull run at the back end of 2018. The price rallied on 24th December up to a high of around $0.4670, before quickly losing upside momentum. It was then forced to trade within the confinements of a descending wedge pattern. XRP lost over 30% in value before it was able to break out from the wedge.

On 8th February a chunky push higher from the bulls was observed, resulting in a breach of the upper acting trend line. XRP/USD jumped around 10% on this day but then eased south to retest the trend line for a few sessions. During the cooling period, price action has formed a pennant structure which saw an eventual big breakout to the upside, as described earlier.

SBI Holdings CEO Bullish on XRP

The SBI Holdings CEO, Yoshitaka Kitao, was recently speaking on XRP and said this year is a significant one for the so-called banker’s cryptocurrency. He believes that the market capitalization of XRP is likely to dwarf bitcoin’s at some point in the future. Kitao has firm belief in the future sucess of XRP and can see it being adopted on a global scale. He was quoted saying:

“Because XRP is already beginning to become international, xRapid will be used for fund transfers in 2019. By increasing the so-called XRP’s plastic use, we anticipate that the XRP market capitalization will easily exceed the market capitalization of bitcoin.”

SBI has many joint ventures set up with Ripple across the blockchain industry; it’s therefore not too surprising to see such comments. The organization will also be launching its very own cryptocurrency exchange called VCTRADE, scheduled for March. Deposits and withdrawals for bitcoin, XRP, and Ethereum (ETH) are already available on the platform.

Technical Review – XRP/USD

XRP/USD daily chart.

Given current upside, eyes must now be on the next likely barriers of resistance for the bulls. A supply area noted from $0.3450 up to $0.3600 is the next target; XRP has not traded comfortably above this region since 10th January. A break above this zone should put the bulls in an excellent position to retest the $0.4000 area. On several occasions, this price territory has caused issues for the bulls in their attempts to push further north. In terms of support, this is seen back down at the psychological $0.3000 mark. If that fails to hold, then there is a demand which runs from $0.3000 down to $0.2500.

Disclaimer: The author owns Bitcoin, Ethereum and other cryptocurrencies. He holds investment positions in the coins, but does not engage in short-term or day-trading.

Featured image courtesy of 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 124 rated postsKen has over 8 years exposure to the financial markets. During a large part of his career, he worked as an analyst, covering a variety of asset classes; forex, fixed income, commodities, equities and cryptocurrencies. Ken has gone on to become a regular contributor across several large news and analysis outlets.




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3 Things You Need to Know About the Market Today: New High in Gold, Dow 26,000?, Euro Weakness

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1, Gold Jumps to 9-Month High, $1360 in Sight

Gold Futures, 4-Hour Chart Analysis

We have been following the resurrection of gold in the past few months, and since fundamentals just got better for the precious metal, the current technical strength is great news for long-term investors. Today, gold quietly reached a new 9-month high, despite the still ongoing risk rally and the relative strength of the US Dollar.

The metal topped the $1330 level, and with the next major resistance level being found near $1360, a quick surge to the vicinity is in the cards in the coming days. We continue to advise holding gold for the long run, and for now, the short-term technicals also remain bullish. Should the risk rally finally roll over, the uptrend could even accelerate, with longer-term targets being found near $1400 and $1550.

2, US Stocks Drift Lower After Long Weekend as Trade Talks Resume

Dow 30 Futures, 4-Hour Chart Analysis

US stocks are having a quiet start for the day, with the major indices drifting slightly lower following the long weekend. The US economic calendar is empty today, and all eyes will be on the trade talks with China which are set to resume today in Washington in the wake of the unexpected extension of last week’s round of negotiations in Beijing.

The Dow, which approached the 26,000 level last week during the Friday surge to new 9-week highs, is lower today, in-line with the market-wide trends. The mega-cap index could get a lift in early trading thanks to the better-than-expected quarterly report by Walmart (WMT). The firm’s holiday-quarter sales topped estimates, despite the reports regarding the widening growth-gap between online and brick-and-mortar stores, and in light of the positive guidance by the company, the pre-market surge in the stock is no surprise.

With the week’s main economic releases coming in the second half of the period, today we could be in for another choppy session on Wall Street. That said, the momentum of the recovery-rally continues to be suspicious, and especially given the weakness in the Nasdaq, investors should pay close attention to the Volatility Index (VIX), market internals and other under-the-hood indicators for signs of negative divergences.

3, Euro Under Pressure Again, Despite Sentiment Beat

EUR/USD, 4-Hour Chart Analysis

While the Dollar’s break-out to new multi-year highs still didn’t happen last week, technicals continue to agree that the long-term uptrend in the reserve currency will continue. The Euro, on the other hand, is still showing signs of broad weaknes, drifing lower against the Dollar and the Pound today, despite the better-than-expected German Zew Economic Sentiment report.

The indicator is still deep in negative territory, and together with the recent weakness in the Eurozone PMIs and industrial production, recessionary fears seem to be legit in Europe.

We will have a new batch of PMIs coming out tomorrow, and together with the Fed minutes a huge day could be ahead for forex markets and especially for the EUR/USD pair. The 1.12 level could be tested in the case of another negative surprise in the PMIs, while the Fed minutes will be under scrutiny even more than usual following the sharp dovish shift by the Central Bank.

ChartBook

Major Stock Indices

S&P 500 Futures, 4-Hour Chart Analysis

Nasdaq 100 Futures, 4-Hour Chart Analysis

VIX (US Volatility Index), 4-Hour Chart Analysis

DAX 30 Index CFD, 4-Hour Chart Analysis

FTSE 100 Index CFD, 4-Hour Chart Analysis

EuroStoxx50 Index CFD, 4-Hour Chart Analysis

Nikkei 225 Futures, 4-Hour Chart Analysis

Shanghai Composite Index CFD, 4-Hour Chart Analysis

EEM (Emerging Markets ETF), 4-Hour Chart Analysis

Forex

USD/JPY, 4-Hour Chart Analysis

GBP/USD, 4-Hour Chart Analysis

EUR/GBP, 4-Hour Chart Analysis

AUD/USD, 4-Hour Chart Analysis

Commodities

WTI Crude Oil, 4-Hour Chart Analysis

Copper Futures, 4-Hour Chart Analysis

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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 466 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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