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Analysis

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

Selloff Resumes as Italian Budget Crisis Deepens

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It was another ugly day for risk assets globally, with equities getting hit particularly hard and although the major US indices managed to hold on above last week’s lows, the charts are now looking wounded even on Wall Street.

There were plenty of negative catalysts dragging lower stocks during the session, with especially the ugly Italy-European Union budget debate causing turmoil in Italian government bonds, equities, and to a lesser extent, the Euro.

Nasdaq 100 Futures, 4-Hour Chart Analysis

The new bear market lows in the main Chinese indices also weighed heavily on sentiment throughout the day, while the post-Fed-minutes rise in US Treasury Yields also added to the worries. Wall Street opened lower, and after a brief rally attempt sellers took control of the market, and the rout didn’t stop until the closing bell with the Nasdaq leading the way lower yet again.

The tech benchmark shed a bit more than 2% on the day, and stocks finished with deep losses across the board, despite the better-than-expected quarterly report of Philip Morris (PM) and the beat in the Philly Fed Index.

Russell 2000, 4-Hour Chart Analysis

The short-term trend in the US is undoubtedly bearish, and although all benchmarks, including the Russell 2000, are holding up above their recent multi-month lows, we would still treat any rally as a selling opportunity in stocks.

Tomorrow we could see fireworks again, and the Asian session could already be very active, since several key Chinese economic releases are coming out, such as the quarterly GDP, Retail Sales, and Industrial Production.

2-Year US Yield, 4-Hour Chart Analysis

Treasuries had a very hectic session, as yields, especially on the short end of the curve got close to their recent highs in early trading before pulling back due to the intensifying Italy-related worries towards the end of the US session.

Given the recent hawkish tilt in the Fed’s rhetoric, strong flattening of the yield curve could be ahead, should the equity selloff deepen, as we don’t see new highs on long-dated yields in that case, but a quick change in the tightening schedule of the US central seems less likely now.

Dollar Confirms Swing Low amid Risk-Off Flows

EUR/USD, 4-Hour Chart Analysis

The EUR/USD pair dipped below the 1.15 level again, and although the momentum of the move is weak, the Dollar Index also confirmed the swing low that we pointed out yesterday. The reserve currency could be ready to test its August highs, even as the most vulnerable emerging market currencies are still relatively strong.

Given the expansive fiscal policy of the Trump administration, it’s no surprise that the Dollar is not surging higher, even as the troubles in the Eurozone are way deeper. Still, the Greenback entered another leg higher in its uptrend, and besides the safe-haven Yen, no major currency is in a bullish technical position compared to the USD even form a short-term perspective.

That said, forex markets could see very hectic conditions in the coming busy months, with the US midterm elections, the possible Chinese crisis, the ongoing quantitative tightening, and of course Donald Trump all capable of causing wild swings in the major pairs.

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 379 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

Pre-Market Analysis And Chartbook: Stocks Turn Lower as Treasury Yields Eye Multi-Year Highs Again

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Thursday Market Snapshot

Asset Current Value Daily Change
S&P 500 2,791 -0.91%
DAX 30 11,664 -0.43%
WTI Crude Oil 69.16 -1.30%
GOLD 1,227 0.16%
Bitcoin 6,438 0.01%
EUR/USD 1.1486 -0.11%

Equities are broadly lower after the opening bell on Wall Street, with the selloff in China and the rise in US Treasury yields setting the tone for the day so far. The risk-off shift that dragged even the mighty US stock market lower last week continues to dominate trading globally, and while volatility is well below its recent peak, bulls are on the defensive with regards to the majority of risk assets.

Shanghai Composite Index CFD, 4-Hour Chart Analysis

The Shanghai Composite hit yet another 4-year low today, amid rumors on forced liquidations following the hawkish surprise of yesterday’s Fed meeting minutes. The Chinese index confirmed its bear market again, and as the trade war rhetoric of the Trump administration will likely heat up before the midterms in November, selling pressure could remain strong.

FTSE 100 Index CFD, 4-Hour Chart Analysis

With the likelihood of a no-deal Brexit increasing, nervous trading continues on the related assets, with especially British equities feeling pain lately. The FTSE 100 has been lagging even the relatively weak European markets, and although the benchmark is trading above its spring lows, thanks mostly to the long-term weakness in the Pound, short-term technicals are very weak, and a breakdown below to a new almost 2-year low looks imminent.

Economic numbers have been mixed today, with British Retail Sales missing the consensus estimate by a mile, while the US Philly Fed Manufacturing Index came in slightly better than expected. The negative surprise added to the pressure on British stocks, although forex markets are little changed and the Pound remained relatively stable.

US Stocks Lower Again amid Choppy Consolidation

S&P 500 Futures, 4-Hour Chart Analysis

The major US indices opened lower and extended their losses in the first hour of trading, with the S&P 500 still trading in a clear short-term downtrend following last week’s plunge. Treasury Yields, particularly on the short-end of the curve are aback near their multi-year highs after yesterday’s Fed surprise, and that weighs heavily on investors sentiment.

Philip Morris (PM) is up by more than 3% following its earnings report, as the company continued the quarter’s trend of positive surprises, but the broader market is still largely ignoring the bullish news, as US investors are focusing more on the mounting funding risks and the strengthening international headwinds.

Copper Futures, 4-Hour Chart Analysis

While currencies are relatively calm today, commodities are having an active session, and crude oil and copper are both headed lower amid the fresh risk-off shift, while old is flat thanks to safe-haven flows. WTI crude hit another one-month low today after yesterday’s breakdown, falling below $69 per barrel and copper is also in a precarious technical position.

The volatility compression pattern looks to be ending in the industrial metal, as we expected, given the weakness in China, it’s no surprise that the commodity moved below its short-term range. A drop below the strong support near $2.70 could mean that copper resumed the broad downtrend, and that would be a bearish sign concerning the global economy.

ChartBook

Major Stock Indices

Nasdaq 100 Futures, 4-Hour Chart Analysis

Dow 30 Futures, 4-Hour Chart Analysis

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

DAX 30 Index CFD, 4-Hour Chart Analysis

EuroStoxx50 Index CFD, 4-Hour Chart Analysis

Nikkei 225 Futures, 4-Hour Chart Analysis

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

Forex

EUR/USD, 4-Hour Chart Analysis

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

Gold Futures, 4-Hour Chart Analysis

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 379 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

Monero Price Analysis: XMR/USD is Stable and Gunning for Potential Gains on “Bulletproofs” Technology Update Day

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  • Monero developers have released an updated version to their protocol, implementing “Bulletproofs”.
  • XRM/USD is within a range block, with price behavior suggesting of a potential imminent breakout higher.

Monero Becoming First Crypto Over Billion-Dollar Market Cap Implementing “Bulletproofs”

Developers at the Monero foundation, have released an updated version to the protocol. This will be live from 18th and 19th October. They are becoming the first network to try out “bulletproofs”. The goal of this technology is to significantly decrease the weight of confidential transactions. From today, 18th October, the privacy-focused cryptocurrency will be testing this.

The move from Monero will make them the first crypto with over a billion-dollar market cap, to try out the “bulletproofs” technology. Over the past year, the foundation has been working on cutting the size of its confidential transactions, by at least 80 percent.  A full overview of the upgrade was posted in a blog post by Monero.

The purpose of bulletproofs are to facilitate confidential transactions. Senders and recipients addresses will remain visible, but the amounts being sent is concealed. The technology also aims to reduce transaction times and fees.

Sarang Noether, a spokesperson for Monero and a key part of the bulletproof integration, was recently speaking on the upgrade. He noted that “Bulletproofs will be replacing the “zero-knowledge range proofs”, of which their confidential transactions are reliant on. The cryptocurrency will activate the technology during its next system-wide upgrade, or hard fork. An upgrade that will require nodes to adopt a new software. Furthermore, Sarang added, “hard forks are sometimes colored as a risky process. However, this upgrade is part of Monero’s bi-annual cycle to introduce new features.”

Technical Review – 4-hour Chart

XMR/USD 4-hour chart

XRM/USD for the past going on three sessions now has been trading within a tight range-block. This trading behavior coming after the aggressive movements seen just some days before. On 11th October the price had spiked over 10% lower. To then enter a tight range, which saw a huge breakout, jumping around 20% high. Over half of this spike to the upside was reversed, moving into the three-session range as mentioned above.

Looking to the upside, eyes will be on another range-breakout. Bulls will be wanting to retest the breached supporting trend line. An attempt was made during the rally seen on 15th October, however strong resistance was observed. In terms of support, this can be eyed at the lower part of the current range, around $107.50. If the bears pile enough pressure, it vcould see a fast move back to $100, then further south below demand area from $86-76.

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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4.5 stars on average, based on 32 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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