Oil market participants have now had a few days to digest the decision from the OPEC+ to cut crude supply by 1.2 million barrels per day. Both major oil contracts are below the levels they were trading prior to the announcement, with Brent around $60 and WTI $51 per barrel. Investors were clearly unimpressed by that decision, although they weren’t too disappointed either given that some oil ministers had talked up the prospects of a no-cut in the days leading up to the OPEC+ meeting, while US President Donald Trump was also applying pressure on Saudi not to cut. Additional doubts were raised after the decision to reduce output was made on Friday, when the OPEC refused to specify which country would cut how much – effectively asking the market to trust them. Crucially, though, oil prices haven’t extended their fails (yet). Russia had previously indicated it would be happy with oil prices around $60, which is exactly where Brent is holding right now. What’s more, the OPEC’s aim was to “stabilise” the oil markets, which they have done so – for now. Trump, meanwhile, has stayed quiet about the production cut, suggesting he’s also content with what was a smaller-than-expected reduction. The key questions now are: will the OPEC+ comply with these output targets and will oil prices stop falling further?
Our long-term outlook remains negative but worst of selling probably behind us
While I am doubtful on both the above points, I do, however, think we may have seen the worst of the sell-off and doubt prices will go back down to $30s again. After all, demand from China remains strong. The world’s second largest economy and oil consumer imported a record 10.4 million barrels of crude oil per day in November. Chinese refineries were happy to take advantage of downbeat prices to build up their stocks. However, as the saying in the financial markets go that past performance is not indicative of future results, just because China imported a record amount of oil in November, doesn’t necessarily mean they will do the same in December or January. In fact, with recent falls in the Chinese yuan, you’d think demand would be impacted negatively for dollar-denominated crude oil – and not just from China, but India and Turkey too, among other places. On the supply side, US oil production growth continues relentlessly and will probably continue for the foreseeable future to offset any supply-side adjustments from the OPEC+ group. So, as before, when prices were trading around $84, we maintain our long-term negative view on the oil market. However, as indicated above, prices may go up in the short-term in light of the not-here-nor-there production cuts from the OPEC+ group. Ultimately, we think any short-term gains would be limited and the highs hit in October may not be reached again any time soon.
WTI still holding below trend line
From a shorter-term technical perspective, while the consolidation above the $50 hurdle means WTI has stopped falling, so far we haven’t seen any clear bullish signals. Indeed, the two-month-old bearish trend line remains intact and this has capped the gains since OPEC+ announcement. As a minimum, we would like to see this trend line break before entertaining the bullish scenario. Ideally, the bulls would want the old high at $54.50 to break to confirm a short-term reversal in the trend. But if $50 gives way on a daily closing basis then WTI could head towards the Fibonacci levels shown on the chart, with the long-term 61.8% retracement at $45.35 being the most important of such levels.