Geopolitics shifts oil trade

I need to review my oil trade, having seen the expected geopolitics risk stop me out overnight.

Source: Bloomberg

Intraday volatility in oil is reaching a new level as the geopolitical rumours are doing their best to jolt oil prices higher.

A quick synopsis of what’s happened overnight:

  • Russia suggests it is ‘ready to meet in any format’ and that Saudi Arabia had proposed each OPEC nation cut output by up to 5%.
  • Saudi Arabia has since said it is ‘willing to cooperate’ but has not proposed the ‘5%’ quoted production cuts, nor had it asked Russia to do the same.

Conclusion: Jawboning

  • OPEC has shown no willingness to work together and cut production for the past 26 months - its last opportunity to act as one in December ended with production ramping up as forecasted.
  • Russia is one of Tehran’s biggest allies – Tehran is looking for an easy re-entry into world oil markets and a high price would offset initial capex issues involved with switching production back on.
  • Tehran’s re-entry into the oil markets is not in the political or economic interest of Saudi Arabia. The conflicts in Yemen and Syria are quasi-conflicts between Riyadh and Tehran.
  • The Russian-Saudi talks look to be more about creating price spikes than actual action, and other politics will cause inaction.

Oil trade – reviewing the fundamental case

  • Geopolitical tensions and OPEC inaction – these are clearly in play, as events overnight illustrate
  • Non-OPEC, non-US producers are continuing to maximise output – Russia’s comments could see it breaking this fact but probability is low.
  • The EIA is showing stockpiling at record levels – levels hit 8.383 million barrels as of January 22 versus estimates of 3.27 million barrels. Yet oil rallied?
  • The onshore shale-gas trade is seeing rig counts down but not collapsing – EIA suggested the decline is being cushioned by the record stockpiling.
  • Chinese demand is not absorbing supply.


None of the current talk/movements alter my current view of the demand/supply equation for oil. All fundaments still suggest sub-US$40 a barrel oil prices in the first quarter of 2016.

Brent trade idea:

I suggested selling strength up to US$35 a barrel as I expect inaction from OPEC and non-OPEC (Russia’s talk of cuts in my view are just that – talk). I stand by this reasoning, but I am aware that all current news, whether positive or negative, is seeing Brent rally – short covering is the most likely reason.

With this in mind, I want to see the cover rally lose momentum – our technical analyst Josh Mahony showed that oil could not hold the December support line overnight and dropped back. The chart also showed it hit overbought levels on the stochastics and RSIs, and dropped back immediately. I still think selling strength is an advantageous trade but I need the market to tell me this is the case, which means holding the line till the rally dies down.

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