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Can OPEC stop the bear market on OIL?

10:47 5 December 2018

 

The pace of oil price declines over the past seven weeks can be only matched by the 2014 bloodbath caused by the US shale revolution. Understandably alarm bells are ringing among key producers, who will meet on Thursday to discuss their response. Can they convince investors that the worst is over?

Summary:

  • OPEC to discuss output cut amid heavy price declines
  • The Saudis would like to cut aggressively but face significant pressures
  • Markets see a cut of at least 1mbd
  • OIL above key support zone

Why have oil prices slumped by 30%?

Let’s start with the fact that the rally that led Brent (OIL) close to $90 was fueled by speculation that sanctions on Iran could result in a major deficit on the market. This proved to be wrong once Donald Trump granted waivers for 8 importers and (crucially) the Saudis ramped their output under the US pressure. Suddenly there was too much oil and traders had to scale back their bets in an aggressive fashion. On top of that, the US shale output expansion is unabated and this has resulted in a long series of inventory increases.

Can the OPEC change the situation?

There’s a perception that the cartel faces too many conflicts to produce a meaningful cut. Let’s consider the Saudis; taught by tough lessons from 2015, they’d love to cut output aggressively to ramp up prices but  fear the US reaction amid controversy and outrage over the murder of  journalist Jamal Khashoggi. Other examples are abundant – Russia said it would back the cut but its companies want to sell more oil from their new fields. Having said that, OPEC showed in 2016 that it still could impact the market and a decisive reaction now would be the first step. Markets are looking for a cut of 1 to 1.4mbd (million barrels per day) for 2019 from OPEC and Russia – a cut of less than 1mbd or a cut without a specified number could end in disappointment.  

Technical analysis: OIL at key level

The OPEC meeting takes place at a very important time from the chart's perspective. Prices literally crashed from the 4 year high of $86.70 and stopped at the key support marked by a consolidation from early 2017. Although the lower limit of the channel has been broken this might be less important for as long as prices could climb back into it. Should a rebound occur, the key resistance will be seen at $70.50.

This content has been created by X-Trade Brokers Dom Maklerski S.A. This service is provided by X-Trade Brokers Dom Maklerski S.A. (X-Trade Brokers Brokerage House joint-stock company), with its registered office in Warsaw, at Ogrodowa 58, 00-876 Warsaw, Poland, entered in the register of entrepreneurs of the National Court Register (Krajowy Rejestr Sądowy) conducted by District Court for the Capital City of Warsaw, XII Commercial Division of the National Court Register under KRS number 0000217580, REGON number 015803782 and Tax Identification Number (NIP) 527-24-43-955, with the fully paid up share capital in the amount of PLN 5.869.181,75. X-Trade Brokers Dom Maklerski S.A. conducts brokerage activities on the basis of the license granted by Polish Securities and Exchange Commission on 8th November 2005 No. DDM-M-4021-57-1/2005 and is supervised by Polish Supervision Authority.

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CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 79% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 79% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

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