Oil trade has been on the decline these past few weeks as conflict data pulls prices in different directions. But, according to some, a correction may be underway.
Reuters’ John Kemp noted in its weekly column on fund trading that market movers last week were relatively indifferent to oil futures, all thanks to mixed signals from the sector and the media about where oil fundamentals were going. They were a little more interested in oil products than futures for crude oil, but that was as far as activity went.
In a way, this speaks of suppressed price volatility, probably to the dismay of some traders, at least. But if you have on the one hand the IEA and OPEC who say that oil demand this year will remain 8.1-9.1 million bpd lower than the last, and on the other, high frequency data that suggest that this demand in one or other key picks markets, it’s easy to see where thick submerged volatility is coming from.
Yet from a different perspective, traders can wait for a correction. This is what Capital.com’s Nathan Batchelor suggested in a analysis earlier this week. Citing technical analysis, he suggested that oil could set this week for a major correction before the next price rally begins.
If the rally does not materialize, which is always a possibility, then prices will fall again as disappointed traders sell. Oil was down early Tuesday after it started the week with gains, mostly on the back of reports that China is preparing to boost its imports of crude oil from the United States according to the trade that the two sealed last year.
On the flip side, the Energy Information Administration sei in their latest report on drilling productivity that drillers added drilling in the Permian and the Bakken. While not unexpected, news of a handful of shale oil farmers tends to put pressure on prices amid pessimistic oil demand forecasts, and despite projections that supply will shrink soon enough to raise prices to increase. The last to come up with such a projection was Bank of America, which sei it expected Brent crude to reach $ 60 a barrel in the first half of next year due to a tightening global oil market.
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“Back in June, we raised our oil price forecasts by $ 5 per barrel (/ bbl) and argued that Brent would average $ 43 / bbl in 2020 and $ 50 / bbl in 2021,” said Bank of America analysts. But now they see a deficit in oil markets in the second half of the year, until the tune of 4.9 million bpd, reduced to 1.7 million bpd in 2021.
Some may argue that it is too early to talk about shortages, especially since some OPEC members, in particular Saudi Arabia, have already called off their production in July. But as demand grows stronger, the surplus could, at least, shrink to levels that support higher prices.
For now, all eyes are on OPEC +. The group met on Wednesday to discuss the progress of its production control agreement. While no changes are expected in this deal, traders will look to get a kick out of the general sentiment in the cartel, which is starting this month to reduce production cuts from 9.7 million bpd to 7.7 million bpd, to take effect to remain until the end of the year.
The OPEC + is likely to cause the correction in oil prices that some expect, but a surprising inventory by the EIA, which also reports on Wednesday, could do so. The EIA has been reporting heavy inventory pulls for the last three weeks, with a total of more than 20 million barrels.
By Irina Slav for Oilprice.com
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