Crude oil price declines as US inventories and production put pressure on OPEC

Rising US production drive oil prices lower. However, with the US-Iran disagreement failing to lift crude, the focus turns to OPEC who could have difficulty maintaining output restrictions.

US inventories and production build brings four month low for crude

Crude prices have crashed lower over the past three weeks, bringing about the lowest price in both WTI and brent since January. Yesterday’s US inventories figure highlighted the ongoing war that is being fought between the US (who want low prices) and OPEC+ (who want high prices). That report from the environmental impact assessment (EIA) saw total petroleum stockpiles rise by the highest amount since 1990. The fact that this came during the driving season (typically a time of year when stocks are used, not built) is particularly notable. It also came within an environment where the US continues to export huge amounts of crude, while limiting imports from the likes of Saudi Arabia and Venezuela. All that points towards huge production from the US, which has been borne out in the data after output hit a record high. The chart below highlights the huge ramp up in production over recent years, as the country gains further market share.

What will OPEC do?

That rising market share of the US brings about another crucial topic for oil traders, with the ramp-up in US production providing the Organisation of the Petroleum Exporting Countries (OPEC) with a progressively harder task of implementing further production limits on member nations. The decision to depress output is part of a policy whereby OPEC can help drive crude prices higher.

However, should we conintue to see the US raise production, we could see the willingness of OPEC to maintain cuts tested. After all, they are losing valuable export revenue while losing market share to the US. The meeting is currently scheduled for 25 June, yet the closer we get to that meeting, the more sensitive markets are going to be to rumours over what will be the likely outcome. There could even be a delay should OPEC realise that they may find difficulty in obtaining their desired outcome. A failure to enact further output restrictions or a delay to the meeting would likely be greeted with another bout of selling for crude.

US-Iran tensions bubble along

Tensions between the US and Iran have been a relative constant throughout much of US President Donald Trump’s tenure as President, with his decision to withdraw from the 2015 nuclear deal raising the likeliness of conflict between the countries. Despite continued support from other nations, the deal which ensured Iran limits their nuclear capabilities in return for greater market access holds far less value without the US involvement. With Iranian crude exports on the slide, something has to give. There is a good chance we will see Iran resume steps to further their nuclear capabilities, ramping up the chance of conflict between the two sides.

Ultimately, it is highly unlikely that conflict ever comes to bear, yet the continued posturing over a potential clash between the two sides remains a potential bullish scenario for crude prices. Yahya Rahim Safavi, a senior Iranian military aide, warned that 'the first bullet fired in the Persian Gulf will push oil prices above $100.' While Iran would have you believe that we could see some form of conflict, this is highly unlikely and for the most part any rally attributed to the fear of such action would be fleeting. The issues associated with Iran has typically been associated with the falling output that has come as a result of US sanctions on Iranian exports. However, with other OPEC members making up for that production decline, the net effect should be neutral.

Crude technical analysis

The brent daily chart highlights the clear breakdown over the course of the past three weeks, with the price falling into the $59.23 support level established in January. The past three days have seen prices stabilise, yet there is a potential that this is simply another pause like that seen in late May.

The hourly timeframe highlights the recent ascent into a deep Fibonacci retracement zone, as the price trades within a short-term rising wedge pattern. The stochastic moved fleetingly into overbought, yet momentum appears to be turning lower once more now. With that in mind, the sellers look likely to come in once again, where a bearish outlook remains in play unless we break through the $62.07 swing high.

IGA, may distribute information/research produced by its respective foreign affiliates within the IG Group of companies pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the research is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, IGA accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact IGA at 6390 5118 for matters arising from, or in connection with the information distributed.

The information/research herein is prepared by IG Asia Pte Ltd (IGA) and its foreign affiliated companies (collectively known as the IG Group) and is intended for general circulation only. It does not take into account the specific investment objectives, financial situation, or particular needs of any particular person. You should take into account your specific investment objectives, financial situation, and particular needs before making a commitment to trade, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit.

Please see important Research Disclaimer.

Trade on commodities

Trade commodity futures, as well as 27 commodity markets with no fixed expiries.1

  • Wide range of popular and niche metals, energies and softs
  • Spreads from 0.3 pts on Spot Gold, 2 pts on Spot Silver and 2.8 pts on Oil
  • View continuous charting, backdated for up to five years

1In the case of all DFBs, there is a fixed expiry at some point in the future.

Live prices on most popular markets

  • Forex
  • Shares
  • Indices
Sell
Buy
Updated
Change
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Sell
Buy
Updated
Change

Prices above are subject to our website terms and agreements. Prices are indicative only. All shares prices are delayed by at least 15 mins.

Sell
Buy
Updated
Change
-
-
-
-
-
-
-
-
-
-
-
-
China 300
-
-
-
-

Prices above are subject to our website terms and agreements. Prices are indicative only. All shares prices are delayed by at least 20 mins.

The Momentum Report

Get the week’s momentum report sent directly to your inbox every Monday for FREE. The Week Ahead gives you a full calendar of upcoming key events to monitor in the coming week, as well as commentary and insight from our expert analysts on the major indices to watch.

For more info on how we might use your data, see our privacy notice and access policy and privacy webpage.

You might be interested in…

Find out what charges your trades could incur with our transparent fee structure.

Discover why so many clients choose us, and what makes us a world-leading provider of CFDs.

Stay on top of upcoming market-moving events with our customisable economic calendar.