U.S. West Texas Intermediate crude oil futures are in a position to close lower for the week after giving back all of its earlier gains. The week began with buyers setting a bullish tone amid speculation OPEC and its allies would extend or even increase their output cuts, however, prices turned south mid-week as reports began to swirl that President Trump was considering easing sanctions against Iran, a move that would lead to increased supply.
Essentially, the bullish sentiment at the start of the week was fueled by optimism over supply. The bearishness at the end of the week is being fed by a pessimistic outlook for demand.
Bullish Factors
The bullish factors this week were Saudi Arabia’s appointment of a new oil minister, OPEC and its allies’ pledge to continue to cut output by 1.2 million barrels per day, a bigger than expected drawdown in U.S. crude oil inventories and optimism over a potential breakthrough in the U.S.-China trade dispute.
Saudi’s Appoint New Energy Minister
What’s exciting the bullish traders this week is the appointment of Saudi Arabia’s king of his son, Prince Abdulaziz bin Salman, as energy minister on Sunday.
Prince Abdulaziz is not new to the oil game. He’s been a long-time member of the Saudi delegation to OPEC so he is familiar with its operations. On Sunday he said the pillars of Saudi Arabia’s policy would not change and a global deal to cut oil production by 1.2 million barrels per day would be maintained. That’s good news because this plan has been propping the market up for at least two years.
Prince Abdulaziz also added that the so-called OPEC+ alliance, made up of OPEC and non-OPEC producers including Russia, would be in place for the long-term.
U.S. Energy Information Administration Weekly Inventories Report
The EIA reported on Wednesday that U.S. crude supplies fell by 6.9 million barrels for the week ended September 6. Traders were looking for a 2.8-million-barrel drawdown.
The EIA report also showed a weekly supply decline of 700,000 barrels for gasoline, while distillate stockpiles climbed by 2.7 million barrels. Analysts were looking for a 1.4 million barrel draw in gasoline and a 220,000 barrel rise in distillate supplies.
Bearish Factors
The bearish factors that stopped the early rally and drove prices sharply lower the last three days were speculation that President Trump would ease sanctions against Iran as a goodwill gesture ahead of a meeting with Iranian President Hassan Rouhani, and OPEC and IEA reports pointing to an oil surplus next year.
Washington May Ease Sanctions against Iran
This week’s steep sell-off was triggered by the firing of National Security Advisor John Bolton and a report that President Trump weighed easing sanctions on Iran, which could raise global crude supply at a time when producers are worried about lower global demand growth.
According to Bloomberg, Trump discussed easing sanctions on Iran to help secure a meeting with Iranian President Hassan Rouhani later this month.
The Bloomberg report, attributed to three unnamed sources, said Bolton argued against such as step. This may have been why he was fired or quit his position earlier in the week.
Not only will the easing of sanctions on Iran bring new oil into the market, but experts are saying it may hit the market before the end of the year. That’s a big concern because even if the U.S. and China strike a deal to end the trade war in October, two months will not be enough time to increase demand, adding further to a potential global supply glut.
Bringing more oil into the market will also undermine the OPEC-led attempt to tighten supply and stabilize prices by reducing output from its members and major ally producers.
IEA Looking for Lower Demand Growth
The International Energy Agency (IEA) left its oil demand growth forecasts for oil demand growth unchanged at 1.1 million barrels per day for 2019, and 1.3 million barrels per day in 2020. It based these projections on the assumption that there would be no further deterioration in the economic climate and in trade disputes.
Technical Analysis
November WTI Crude Oil Weekly Technical Analysis
Weekly Trend Indicator Analysis
The main trend is down. A trade through $60.77 will change the main trend to up. A move through $50.48 signal a resumption of the downtrend after several weeks of counter-trend price action.
The main range is $73.52 to $45.05. Its retracement zone at $59.29 to $62.64 is resistance.
The minor range is $45.05 to $65.23. Its retracement zone at $55.14 to $52.76 is support.
The market has been bouncing between the retracement zones since early June, however, while producing a pair of lower tops and a lower bottom, indicating a downside bias.
Weekly Trend Indicator Forecast
Based on this week’s price action, the direction of the November WTI crude oil futures contract the week-ending September 20 will be determined by trader reaction to the minor 50% level at $55.14.
Bearish Scenario
A sustained move under $55.14 will indicate the presence of sellers. If this move creates enough downside momentum then look for the selling to possibly extend into the minor 61.8% level at $52.76. This is a potential trigger point for an acceleration into the main bottom at $50.48.
Taking out $50.48 will signal a resumption of the downtrend with $45.05 the next potential downside target.
Bullish Scenario
A sustained move over $55.14 will signal the return of buyers. If this move creates enough upside momentum then we could see a retest of $58.64, followed by the main 50% level at $59.29.
Overview
Sentiment shifted this week when crude oil traders shifted from optimism over falling supply to pessimism over the possibility of higher supply.
We’re also in a news-driven market. Instead of prices being driven by the weekly inventory data, traders are now watching and reacting to news about the easing of trade tensions between the United States and China, and the possibility President Trump may ease sanctions against Iran.
However, the easing of sanctions against Iran will be the most significant event since this will likely have an almost immediate bearish effect on supply, while trade talk progress will have a limited effect on demand until an actual trade deal is announced. And even then, it will take time before it actually has a bullish impact on demand growth.
