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Fed Or No Fed, Road Ahead For Oil Bulls May Be Bad

By Investing.com (Barani Krishnan/Investing.com)CommoditiesAug 23, 2019 04:12AM ET
www.investing.com/analysis/fed-or-no-fed-road-ahead-for-oil-bulls-may-be-bad-200457852
Fed Or No Fed, Road Ahead For Oil Bulls May Be Bad
By Investing.com (Barani Krishnan/Investing.com)   |  Aug 23, 2019 04:12AM ET
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Oil longs are counting on Fed Chair Jerome Powell to sprinkle some magic dust on crude from the podium of the Jackson Hole symposium in Wyoming.

Bears, meanwhile, are counting on ramping U.S. crude production to continue offsetting supply outages or sudden spikes in demand.

Regardless of the outcome in either, crude prices could remain boxed in sideways trading for weeks to come as both camps seek the perfect catalyst to serve their positions— amid the winding down of the U.S. driving season and threats to shale drilling.

Just a couple of weeks ago, oil prices were experiencing some of their greatest volatility ever as the U.S.-China trade war yanked crude around like a yo-yo.

Peaks And Valleys Could Continue; Smaller Zigzags Too

While the price gyrations of recent weeks could continue, there may also be more of the smaller zigzag patterns in a day involving just a few cents.

WTI 60-Min Chart - Powered by TradingView
WTI 60-Min Chart - Powered by TradingView

Case in point were the crude price moves on Tuesday and Thursday, where the change was just about a quarter-point percent or more. In contrast, the swings on Monday and Wednesday were 2.4% and 1.2%, respectively, as the market rallied first on a reversion of the U.S. yield curve that offset recession fears, and fell later as the Federal Reserve’s July meeting minutes downplayed the probability of deep rate cuts.

As the peak U.S. summer driving season nears its end with the approach of Sept. 2 Labor Day holiday, longs in the market are clinging to any support they can find.

But range-bound trades may be their best hope if the Fed doesn't resort to cut rates like they expect, or the U.S.-China trade spat continues to be a drag on the global economy, choking implied demand for crude.

‘Strong Sell’ Call On WTI, ‘Sell’ On Brent

Investing.com has a “Strong Sell” recommendation for West Texas Intermediate crude on its Daily Technical Outlook, projecting a bottom-tier support of $54.79 per barrel, as opposed to Thursday’s settlement of $55.35.

For Brent crude, the benchmark for oil outside of the U.S., the recommendation is a “Sell”. Investing.com’s Daily Technical Outlook projects a bottom-tier support of $59.29 per barrel, versus a last settlement of $59.92.

Fundamentally, oil’s demand prospects aren’t promising at all, although supply snags can continue providing support at the lower level. Hence the projected scenario of range-bound trading, and occasional price spikes.

Olivier Jakob, founder of the Petromatrix oil consultancy in Zug, Switzerland, noted on Thursday that U.S. crude oil imports from Saudi Arabia remained very low at 406,000 barrels per day over a four-week average. U.S. crude oil exports, in contrast, stand at a steady 2.48 million bpd, though well short of the 4-week average high of 3.40 million bpd in June.

U.S. Crude Production Unyielding

And the U.S. Energy Information Administration reports that crude production in the United States has been unyielding for three straight weeks at 12.3 million bpd.Said Petromatrix’s Jakob:

“Current U.S. crude oil exports are close to 1 million bpd below recently shown capacity, and this at a time when the pipeline capacity to the U.S. Gulf is increasing.”
“Unless the U.S. starts to accelerate the pace of crude oil exports, it will be difficult to avoid crude oil stock-builds in October when U.S. refinery runs come down seasonally (on top of the U.S. Strategic Petroleum Reserve sale).”

Oil Bears Have Worries Too In Shale Country

For oil bears, what may be worrisome is the slowdown in shale drilling, which might ultimately impact U.S. production.

Producers in the nation’s oil-rich shale basins are dialing back growth plans in the face of a growing panoply of problems that’s killing returns and keeping skeptical investors at bay, Bloomberg reported last month.

The constraints are manifold, said the report, citing pipeline limits, reduced flow from wells drilled too close together, low natural gas prices and high land costs.

It adds:

“But the most consequential is that shale-well production falls off at such a high rate—as much as 70% in the first year—that you need to keep spending cash on new wells just to maintain output.”

Fed Or No Fed, Road Ahead For Oil Bulls May Be Bad
 
Fed Or No Fed, Road Ahead For Oil Bulls May Be Bad

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Mr Rogers
Mr Rogers Aug 24, 2019 11:40AM ET
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Waiting on a oil play here! The majors are pulling back if, contuned weakness some good buys will be there in technicals to buy oil stocks. Oil stocks are value stocks! some have great dividends too.
Jay Khaye
Jay Khaye Aug 24, 2019 8:44AM ET
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The EIA weekly production data is a projection of incomplete data and is unreliable.  Presently final monthly production data for May2019 is approximately 300,000 b/d below the weekly data.  Monthly reported production from Nov2018 to May2019 is flat.   Although demand is weaker than expected it is still projected to increase 1.1 million b/d year over year. Shale production which had grown based on increased output from wells is flat due to reasons mentioned above.  Number of active rigs has been slowly decreasing.   US production increases accounted for 80% of new production.  Without these gains and the ever increasing demand for oil, (which granted will slow during a recession) will continue ever increasing. It took about 7 years after North Sea production peaked for prices to peak and that will happen after Shale oil production peaks.
Jay Khaye
Jay Khaye Aug 24, 2019 8:44AM ET
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Those are the facts, on a short term basis the markets will over react to current events, but in the medium term and long term, the price of oil has only one direction.. Another factor hurting shale is the low quality of the crude, a barrel of shale oil is equivalent to gas condensate and has other quality issues.  The only country that seemed interested in purchasing the oil was China and now they are adding tariffs.. Take this article with a grain of salt, it is either misinformed or is misleading.
Barani Krishnan
Barani Krishnan Aug 24, 2019 8:44AM ET
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This article intends to inform the reader of the variables in the marketplace. Nothing more, nothing less. By your own admission, what the EIA puts out is accepted as fact in the short term. But if really crude's fundamentals are that insanely bullish and shale is headed to Doomsville, then I guess we should sit squarely at $80 and above. There is simply a constituency out there that doesn't buy the demand story, and that's all this article is trying to point out. Read it from top to bottom, and you'll realize the very shale arguments you are making are in the story too. It's easy to dismiss our work as misleading or misinformed when you don't read enough of it.
Kevin Ripton
Kevin Ripton Aug 23, 2019 7:04PM ET
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We are heading down and then up. The fall off effect in shale is underestimated. When that shows signs of kicking in over the second year the whole supply and demand structure will change dramatically.
Kevin Avila
Kevin Avila Aug 23, 2019 6:23PM ET
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Downwards pressure will continue until only the US makes money on oil... targeting $30 a barrel.
Usman Bhatti
Usman Bhatti Aug 23, 2019 6:23PM ET
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Oil for sure headin for the lows! 45 on the way
Andrew carson
Andrew carson Aug 23, 2019 12:18PM ET
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Was and still a bear trap for now.
ADAM AND EVA
ADAMANDEVA Aug 23, 2019 9:09AM ET
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Excellent !!!
Ahmed Bajkani
Ahmed Bajkani Aug 23, 2019 7:50AM ET
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