What’s the oil trade after the Doha agreement falls apart?

For all the banter on social media this morning that the OPEC meeting (including Russia) would obviously end with a lack of agreement, the 7% downside move in Brent and US oil on open would suggest few had genuinely acted on their view.

Oil
Source: Bloomberg

Granted, US oil had fallen into the meeting, but only by close to $2.

Both Brent and US crude falling so heavily suggests traders reducing bullish exposure, although many will point to other recent supportive factors such as improvement in China, a big fall in the US oil rig count and general USD weakness. Certainly, the market had gone into the weekend OPEC meeting expecting some sort of agreement, although what that looked like was the subject of much debate and the devil was always in the detail. A production freeze from the bulk of OPEC was never really a tough task given total OPEC production had effectively been unchanged for a number of months.

Iran were never going to agree to a freeze given they have just halted their nuclear program in return for lifting the embargo on their oil exports. This would have been a politically unpalatable move, especially as most other OPEC members are currently at the upper limits of their export capacity. The fact is, OPEC look more fragmented than ever and the lack of agreement means the rebalancing of the oil market will simply take longer.

The question now is whether traders will buy this pullback or whether US oil heads towards $35. We have seen our continuous contract hit a low of $38.91, but buyers have stepped in presumably helped by news that output in Kuwait had dropped 60% as oil workers have been on strike over pay. Technical traders will be keen to see if US crude can fill today’s gap and that will require a move into $41.02. A move above $41.02 would be significantly bullish, but I suspect this will be tough going and I feel the upside should be capped into the $39.95 to $40.21 area (50% to 61.8% retracement of today’s gap). A daily close below $38.76 (the 61.8% retracement of the April rally) would suggest initiating short positions for a move into the 5 April low of $35.93.

It’s worth highlighting that the next OPEC meeting is on 2 June, so any rapid downside and the focus will be whether a new agreement can materialise here. The crux of the matter is Saudi Arabia are happy to see oil at current levels, but if price really increases, not only does it bring many of the US shale gas players back in, but a number of high priced projects in OPEC nations would also come on line. One can see why they walked away today.

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