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How further can oil prices tumble?

U.S. shale oil production declined by more than half a million barrel from 2015

CFDs are a leveraged product and can result in losses that exceed deposits. Trading CFDs may not be suitable for everyone, so please ensure you fully understand the risks and take care to manage your exposure.
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Oil prices dominated headlines yesterday as it fell to a new 6 years low after traders digested OPEC’s strategy to defend the market share strategy and not agreeing on new output levels. Although reports from EIA on Monday shown U.S. shale oil production declined by more than half a million barrel from 2015 peak, the aggressive production levels from Saudi Arabia, Iraq, Russia, and the new coming player “Iran” will keep markets flooded with oil in the foreseeable future, and thus more pressure on prices.

WTI & Brent fell on Monday 5.8% and 5.3% respectively.

Other indicators providing a negative short-term outlook:

  • Hedge funds short positions could have reached record highs as positioning pre OPEC meeting shown 172 million barrels were shorted, slightly below the record high 178 million short positions posted earlier in the year.
  • Options markets are pricing higher cost on buying puts than buying calls, providing further technical indication that markets are more bearish on the short run.
  • Breaking below key support levels for WTI and Brent could open the way for further declines.

Given these facts, the key question now is how further prices can fall from current levels?

From a fundamental perspective, prices are not likely to be supported unless one or more of the below scenarios occur

  • Unexpected immediate drop in U.S. shale production “not likely”
  • OPEC calls for emergency meeting to implement a new strategy “not likely”
  • Surprise acceleration in global economic growth “also not likely”

After both benchmarks broke below lowest levels tested in 2015, the next key support for WTI stands at $32.40 (2008 low) and $36.2 for Brent.

The real risk that could take prices to $30 or below is when strategic reserves for oil importing economies get close to full capacity or deciding to stop building their inventories, and China is clearly the major player in this field.

However, in the very short run, traders might be booking profits through closing their short positions “short covering” which could cause immediate spike in prices “similar to the movement in the last 3 days of August when WTI rallied 26%”, and traders should be ready for higher volatility in prices. 

This information has been prepared by IG, a trading name of IG Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication.  Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. 

CFDs are a leveraged products. CFD trading may not be suitable for everyone and can result in losses that exceed your initial deposit, so please ensure that you fully understand the risks involved.