In my last article I called for a drop in oil prices – and we all saw that WTI barley survived falling below $50. I must confess that I’d expected prices to slip further into higher $40s but on the contrary we saw a rally that took prices all the way up to $57 – close to a very important resistance point at $57.50. But what was behind this rally? Is the trend sustainable? Will prices continue to rise? Is this a short-term rally? Let’s explore these questions in the light of some recent developments.
The most important factor that caused the prices to buoy up was, believe it or not, a rumor: That Saudi Arabia is considering all options to stop oil prices from sliding. No details followed. However, the phrase “easier said than done” aptly fits here. Saudi Arabia simply cannot keep cutting its production which already is at historically low levels. Also, OPEC, albeit run by Saudi Arabia as a de-facto leader, still has other members, and we cannot rule out their roles. Russian oil output has risen while U.S. shale production isn’t slowing down any time soon. Therefore, this recent rally might be over soon if this rumor proves out to be untrue. OPEC and NOPEC meet on Sept. 12 to “review oil markets.” We will find out regarding the production cuts very soon.
Another factor that helped prices to recover was an announcement by office of U.S. Trade Representative that delayed the recently imposed tariffs on China originally meant to be implemented on Sept. 1, 2019, to Dec. 15, 2019. Merry day at the bourse! The S&P was up 50 points while the Dow inched upward by 400 points. Shanghai composite gained 0.42 percent while Shenzhen composite rose 0.62 percent. Once again I will maintain my stand, as I have been ever since the trade talks begin, this is only political posturing and nothing else. We shouldn’t be too naive to think of it as a sign of optimism and that there may be an end to the trade war in near future. In negotiations, both sides have to compromise and give up something. There has to be a win-win, especially in this case. But with Trump’s mindset that’s premeditated to bring China to its knees, we cannot hope for any deal, even in the longer run. In today’s profoundly integrated world one cannot force any other country to do anything. Principle of Reciprocity is in vogue and the only thing that will work. Therefore if your bet for oil markets becoming bullish is this recent apparently positive development regarding trade war, think again!
Oil demand is the most pivotal factor that will hinder a substantial and stable upward price move. We have seen both the IEA and EIA revise and reduce their estimates for oil demand this year. About 700,000 barrels were slashed from second quarter demand growth from 1.6 million since January.
This falling demand could be linked with the Saudi production cuts and we can assume that even if there are further cuts and that these cuts are shared by other members that will not help prop up prices, hence serving as a disincentive for maintaining the said quotas.
Oil Prices Will Fall, Just Wait For A Good Entry Point
Yes. Prices will fall again. This rally is simply not sustainable until or unless there’s some serious development regarding trade talks and/or production cuts. Today, Aug. 14, WTI touched $57.40 at one point and that would have been a great entry point for traders looking to catch some dollars on its way down to $54.40. That will be the second support (important) level and a break from there can initiate another sell-off, taking oil prices even further down. I’d say it will be a good strategy to start gathering some barrels at the current prices gradually so that you can hedge yourself if, and when, oil hikes a little.
If you were short from $57 then $54 would have been a good target. To be a little extra bearish I’d say we will see $51.20 very soon again.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a short position in WTI, BNO, OILX, OIL over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.