Crude Oil Outlook
January Crude Oil futures plunged on Thursday after OPEC announced it was leaving oil production levels unchanged. West Texas Intermediate crude prices traded through the psychological $70.00 per barrel level, dropping close to 7% to just below $69.00, its lowest level since May 2010.
In Europe, Brent crude oil prices were down by about 7% to just below $73, further tightening the spread between it and WTI oil.
Although the market was trading lower going into Thursday’s important meeting, traders still reacted as if the decision was a surprise. Many had expected OPEC to agree to cut oil production to 29.5 million barrels a day from 30 million barrels currently, but this scenario never seemed to show up in this week’s price action.
In my opinion, the decision by OPEC fit the scenario that the hedge and commodity funds were following. Although they may have lightened up a little on short positions going into the meeting, they never seemed to budge from maintaining their massive short positions.
They seemed to have a totally different grasp of the situation, one which would most likely mark a turning point in the global oil market where OPEC would no longer bear the burden of being responsible for production adjustments. Their assessment seemed to be supported by other oil bears who felt that a cut in output from 30 million barrels per day to 29.5 million barrels per day would not be enough anyway to stem the…
Crude Oil Outlook
January Crude Oil futures plunged on Thursday after OPEC announced it was leaving oil production levels unchanged. West Texas Intermediate crude prices traded through the psychological $70.00 per barrel level, dropping close to 7% to just below $69.00, its lowest level since May 2010.
In Europe, Brent crude oil prices were down by about 7% to just below $73, further tightening the spread between it and WTI oil.
Although the market was trading lower going into Thursday’s important meeting, traders still reacted as if the decision was a surprise. Many had expected OPEC to agree to cut oil production to 29.5 million barrels a day from 30 million barrels currently, but this scenario never seemed to show up in this week’s price action.
In my opinion, the decision by OPEC fit the scenario that the hedge and commodity funds were following. Although they may have lightened up a little on short positions going into the meeting, they never seemed to budge from maintaining their massive short positions.
They seemed to have a totally different grasp of the situation, one which would most likely mark a turning point in the global oil market where OPEC would no longer bear the burden of being responsible for production adjustments. Their assessment seemed to be supported by other oil bears who felt that a cut in output from 30 million barrels per day to 29.5 million barrels per day would not be enough anyway to stem the selling pressure.
Guided by comments ahead of the Vienna meeting such as “monitor the market carefully” by Iranian Oil Minister Bijan Zangeneh, the oil market “will stabilize itself eventually” by Saudi Arabia’s Oil Minister Ali al-Naimi, and “The market will fix itself ultimately” by United Arab Emirates Oil Minister Suhail bin Mohammed al-Mazroui, the funds continued to maintain their short positions.
The decision by OPEC is a sign that it feels the oversupply is not being caused by overproduction from the cartel, but because of shale oil. This seems to put the burden of stopping the price slide directly on the U.S. oil producers.
OPEC led by Saudi Arabia chose to leave production at current levels because it feels that price support will continue to erode until it reaches a level that makes shale production too expensive. Many traders believe that U.S. producers are fully hedged at about $90 a barrel, but when these futures contracts begin to expire, they will have to face the forces of supply and demand.
Dropping too far below the $70 per barrel level will put a dent in U.S. production and prices will stabilize and begin to rise as supply disappears. Although several oil producers are hurting including Russia and Venezuela, Saudi Arabia with its massive horde of cash can afford to wait. Clearly their strategy is to stop the flow of U.S. produced shale oil and regain some of its lost market share.
In my opinion, crude oil is close to a bottom because like the Saudi’s say, the oil market “will stabilize itself eventually.” Although the outcome of the OPEC meeting was perceived as bearish, the fund managers already had the result priced into the market and will be more than willing to buy back their short positions from those novice speculators selling at low levels in reaction to the news. This means that rather than try to press the market further. Traders should start to watch for signs of bottoming action. This begins with Friday’s trading session.
The market is expected to feel selling pressure in reaction to the news. This is normal, but with crude oil at technically oversold levels and the funds controlling the game, traders should start to watch for signs of buying. It may take several days or perhaps weeks to develop a solid bottom, but this process is necessary to develop a strong enough support base to support the next rally.
The first sign of a bottom will be a quick reversal to the upside. This generally occurs after a prolonged sell-off like the one we’ve seen in crude oil and the announcement of bad news. Speculators often sell the news into the bottom, but by the end of the day are scrambling to cover their poorly priced positions. This type of trading is often marked with extreme volatility and better than average volume.
It may not occur on Friday because of the thinly traded post-holiday session, but we may be within days of a massive rally in prices. One that is big enough to shake the weaker shorts out of the market and return prices to more reasonable price levels. Since this assessment is speculative in nature, a little counter-intuitive and against the main trend, one may consider exploring the long call option market in anticipation of this rally. The nearby monthly crude oil chart suggests the $64.00 to $63.00 levels may be the best area to begin testing this strategy.
