Crude prices look vulnerable towards year end

Crude oil markets have been gaining on the grounds of various geo-political factors. However, with those fears having a lessened influence, we could be due a drop in crude.

Source: Bloomberg

The crude ascent appears to be getting slower in recent months, with the consistent rate of rise seemingly slowing a little as retracements are becoming ever deeper. The August low of $63.97 came in marginally above the prior swing low of $63.41, coming off the back of a very small rally through $72.88. Thus, while we remain within an uptrend there is also a fear that we are seeing a slow in it. Given the substantial gains seen throughout the June 2017 to June 2018 period, there is an argument to say that we could be moving into a phase which exhibits less of a trend.

The fact is that there are many reasons for traders to see the energy market from different perspectives, and thus the next major break could require a shift in one of these factors.

One of the key determinants of supply is going to be focused around Iran, with the US expected to clamp down on the nation’s export abilities in November. This lessened amount of oil available should drive crude prices higher if taken in isolation. However, while we have seen output from Iran fall, we are also seeing the top producers pick up the slack, with the US and Saudi Arabia raising production. It is also likely that Iran will be selling a substantial amount of crude on the black market, thus negating some of the restrictions. Therefore, while the prospect of a raft of restrictions on the third biggest oil producer is pushing many to call for higher crude prices, the reality is likely to be less convincing.

Keeping with the theme of halted production figures, we have seen a notable impact on market outlook from economic and political volatility in Venezuela and Iraq. Both are important producers, and with output being impacted, there is an expectation that we will see crude prices rise with lower production. However, to an extent we have seen these factors drive market price action, and until we see further news there is unlikely to be a big move off that back of these nations. If you look at past price action, we have often seen peaks come through short-term geo-politically driven reductions in output around the world. There is always the threat of another country cutting output and driving crude prices higher. However, it is also notable that such moves are typically short-term, providing a selling opportunity before the markets equalise once more.

Another issue is that we could start to see a slow in demand, with the global growth picture under threat from US-led trade wars. As we move out of the US driving season, there is reason to believe that demand will drop off, as is typically the case in autumnal months. Looking at WTI from a seasonal perspective, October and November are the only two months with an average negative return over the past 20 years. Either side of those two months we have September (+0.3%) and December (0%) which exhibit minimal historical price growth.

What we are left with is a host of price drivers which do little to boost the price over the short term. Members of the Organisation of the Petroleum Exporting Countries (OPEC) are moving back towards a position where higher production is becoming commonplace.

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Looking at the weekly WTI chart below, it is clear that we are seeing a great deal of hesitation. The creation of lower lows in the stochastic oscillator means that there is a bearish divergence in play. A break below $63.41 would signal a likely breakdown in the price. Until that happens, another leg higher remains a distinct possibility, with a long-term descending trendline of support coming into play. However, without another further fundamental driver sparking further upside, there is a chance we will soon start turning lower.

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