Alexander Khurshudov: oil price decline may drag for 2 months
In the end of May the long-expected correction started at the oil market (pic.1). I had anticipated it 3 weeks earlier starting with the price of $75 for a barrel of Brent, but the dazed bulls pushed the quotes to $80 knocking out the incautious bears. Only later when some commentators started speaking about $100 for a barrel, mass profit taking began.
As a result daily charts show a mid-term downtrend; on Wednesday the price went below $74, but then naturally bounced back. Let's see if the trend can develop.
Its main driving force is the increase in the US shale production. Production grows by about 90 thousand barrels per day every month, with two thirds coming from the Permian Basin. It is hard to say how long the increase will continue. Anyway, no decrease should be expected till the year end.
Other oil producers have more moderate results. The production is stable in Russia, Canada, Iraq, Iran, the UAE, Kuwait, Nigeria. It declines in Algeria, Angola, China, Mexico, Venezuela.
The second reason for the trend's turn was the absence of news related to sanctions against Iran. The oil embargo did not happen and it hardly will. Besides, everyone has got used to the fact that the new US President is only good at fists flailing, but when it comes to striking, he hits both his friends and enemies. In this case he was stopped by the price for gasoline, which have grown by 22% within the year and reached a three-year maximum. The fear of sanctions against Iran also contributed to it.
Bloomberg unexpectedly reported that the US had asked the Saudi Arabia and the OPEC to increase production by 1 mln bpd "off the record". The company is notorious for "news from trusted sources", which is often used as probing action. However, the Saudi Arabia may not be able to increase production; it overdoes the decrease by 12% (pic.2).
The picture shows that in the autumn 2016 the Saudi worked at full capacity to ensure a higher quote for the period to follow. However, they failed to reach it because they are currently producing 9.93 mln bpd instead of the planned 10.1 mln. To my mind, only the UAE and Kuwait have real reserves to increase capacity (within 10-12%), though it won't compensate for the decline in the other countries.
Speaking about the long-term perspective, monthly and weekly charts (pic. 3) indicate a growing trend. The bottom of the trend is not too close, there is still room for decline. The closest support levels are at $71-72, though if the price goes lower $65, this uptrend will break. However, this is hardly possible.
However, one shouldn't think that the price would bounce up and down between the trend's limits. It is summer now, holiday season, so petrol consumption goes up, while the volume of trading goes down. So, I think the current decrease in the price of oil may drag for 2 months. Then, the reason for the next turn of the trend may be tropical storms and hurricanes in the Atlantics.