Oil bounces despite Saudi output increase; Goldman says "Buy"

Summary:

• Oil (+2.5%) and Oil.WTI (+3.3%) both enjoy strong bounce

• Saudi pump record amount; Goldman top trade says “Buy”

• Crude markets look to recover from recent rout

There’s been a notable bounce in oil markets today with both Oil and Oil.WTI enjoying a strong day of gains. Oil has gained around 2.5% to move back above the $60 handle while Oil.WTI is up over 3% and trade north of $52 once more. There’s been little by the way of any fundamental news to support this recovery thus far, with the latest reports actually providing more negative developments for price.

According to a Reuters article which cited a source in the industry, Saudi crude production this month will hit its highest ever level in the region from 11.1-11.3 mbpd. This represents an increase of 0.5 mbpd - or 0.5% of global demand - from the amount seen in October and more than 1 mbpd above the levels seen earlier this year. Saudi energy minister Falih has already stated that the state oil company Saudi Aramco will ship 0.5 mbpd less crude in December than this month due to lower demand, but the kingdom will likely face increasing pressure from US president Trump should they cut output in an attempt to boost prices.

US president Trump took to social media to laud the fall in oil prices, likening the drop to a tax cut and implying that the resultant lower inflation would allow the Fed more room to hold off on raising rates. This tweet ignores the impact of the fall in price on US shale producers who have a higher marginal cost as well as overlooking the fact that the Fed give greater heed to core inflation numbers which strip out volatile aspects such as the Oil price. Source: Twitter  

Goldman Sachs have remained bullish on crude oil in recent weeks despite the plunge in price with the bank listing a long Brent (Oil on xStation) position in its top 10 trade ideas for 2019.

Given the size of dislocations in commodity pricing relative to fundamentals -- with oil now having joined metals in pricing below cost support -- we believe commodities offer an extremely attractive entry point for longs in oil, gold and base,” Goldman's chief commodity strategist Jeffrey Currie said in a report. “Many of the political uncertainties weighing on commodity markets have a significant chance of being addressed in Buenos Aires. This includes some improvement on the China-U.S. relationship and, like in the 2016 G-20 meetings, some greater clarity on a potential OPEC cut.”

Speculative net positioning in Brent crude fell to its lowest level since December 2015 last week. The market made a key long term low the following month and this recent shift could be seen as a possible contrarian indicator to suggest the worst of the selling is either behind us or not far from being behind us. Source: Bloomberg, Saxo Bank

Last week saw another double digit decline for Oil, but the market may have found some support around the recent swing level of 58.68. While it is a bold move to call a bottom here, the recent shift in speculative positioning to its least long since December 2015 could be seen as a contrarian sign that the worst of the sell-off is over. If these lows of 58.68 hold then fib retracements of the decline may offer possible targets for longs or resistance levels to short with the 23.6% at 65.30 the first to keep an eye on if price recover. If the market can recoup more of the losses the 41.4% at 70.30 looks of particular interest given its confluence with prior swing levels. However, if the market does drop below 58.68 then another swoon may lie ahead and longs would need to be careful for the risk of a quick flush lower.

If, and it’s a big if, the recent low of 58.68 can hold then fibs can offer possible levels of interest above with the 23.6% at 65.30 and the 41.4% at 70.30. Source: xStation