The last four days have seen WTI Crude prices plunge almost 10% from their cycle peak near $73 to a $65 handle overnight.
This is the longest run of losses in almost four months as Saudi Arabia and Russia said they are discussing raising output to ease consumer anxiety after prices jumped to levels last seen in 2014.
Saudi Arabia and Russia signaled they’ll restore some of the output they cut as part of a deal between OPEC and its allies that took effect in January last year. Potential opposition from several producers could complicate the group’s effort to reach a consensus when it meets next month in Vienna.
“It was always going to be a tricky announcement of when to ease production cuts,” said Ole Sloth Hansen, head of commodities research at Saxo Bank A/S in Copenhagen. “Oil was already on the defensive.”
However, we have seen all this before – We are now at the peak of a similar shape and timed move as the 2008-2011 rebound…
After the $115 peak in 2011, oil ranged between $115 and $75 for 30 months. A similar dynamic this time would suggest a $70 to $50 multi-year range… which fits with what Russian President Vladimir Putin said last week – that oil prices at $60 fully suit Russia and the country doesn’t want them to spiral higher. Anything above that level “can lead to certain problems for consumers, which also isn’t good for producers,” he said. OPEC and his nation don’t plan to stick to existing output cuts, he said.
And while Goldman Sachs’ fundamental views are that oil prices will strengthen:
Saudi Arabia and Russia signaled today that they would likely ease their production cuts in the second half of the year. Comments by their Energy Ministers suggest that such a decision would be driven by concerns that high oil prices start to impact global economic activity and was spurred by pressure from the US and China to bring barrels back online. Oil prices have sold off on these comments.
While today’s announcement lifts some of the uncertainty on whether and when OPEC and Russia would increase production, we do not view this as a material change to our bullish oil outlook:
this response is occurring because of a tight oil market,
its magnitude is still uncertain but, even at 1 mb/d, such an increase would simply offset the involuntary production declines with the group still committed to restraining output,
even at 1 mb/d, its gradual implementation would leave the market in deficit through 3Q18,
ongoing disruptions in Venezuela and potential losses from Iran are likely to partially offset this higher supply, as well as
require further increases in production in 2019, which will further reduce already limited spare capacity next year.
Despite greater clarity on the OPEC/Russia response function, today’s headlines by no means suggest the oil market is on a smooth path to rebalancing. Instead, the current level of the market deficit, the robustness of the demand backdrop, and the rising levels of disruptions all set the stage for inventories to fall further all the while OPEC spare capacity is drawn down. As a result, even if today’s headlines provide a cap on prices in the short term, we reiterate our $82.5/bbl 3Q18 Brent price forecast (which effectively embedded such a supply response) and still see risks to prices in 2H18-2019 as skewed to further upside. In fact, history shows that increases in OPEC production quotas in a strong demand environment (like today) are followed by higher prices in the subsequent months.
Goldman’s technical team sees significant downside as they warn that crude oil posted a bearish key week reversal…
WTI Crude tested and held the 1.618 extension target at $71.76…
This 71.76 level was the target for a 5th of 5-waves from Jun. ‘17 lows. It’s since posted a bearish key weekly reversal against negatively diverging oscillators. The market hasn’t posted one of these patterns (from a local high) since ‘13.
Bottom line, there’s a good chance the market has completed a 5-wave sequence here, which means that it’s due to start a corrective process.
A short-term top is likely in place, it could take some before WTI is able to resume its uptrend.
Wedges are classic ending patterns that often result in sharp/impulsive breakouts. The breakout thus far has been pretty textbook.
The next congestion area to note is 66.8066.31; includes 23.6% from the Jun. ‘17 low.
The wedge itself suggests potential to retrace the full extent of its ascent to 61.73, near 38.2% retrace 62.23.
View: Next congestion area below 66.80-66.31. Scope to retrace as much as 62.23-61.73.