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Oil market rebalancing called into question. What next for oil prices?

Summary:

  • Oil rigs count rose to 765 from 763
  • All three key institutions related to the oil market doubt the market rebalancing in 2018
  • OPEC’s compliance faded to some extent last month

We got three noteworthy fundamental reports for oil prices this week. All of them cast a shadow on the potential rebalancing in the global oil market. The EIA along with the IEA and OPEC called into question a possible demand surplus next year. What could be even more striking, the Cartel increased its June’s out-turn by 260 kbpd in defiance of the agreement on output cuts.

Let’s begin with the EIA’s report which was unveiled on Tuesday. Admittedly, the US institution lowered its forecast in terms of US shale output growth for the following year (to 9.9 mbpd from 10.01 mbpd projected last month), it trimmed its outlook with regard to an increase of global oil demand for next year from 1.54 mbpd to 1.47 mbpd. Needless to say it shows an importance of a demand side beside a supply side which has drawn most of market’s attention as of late. The worst possible scenario for oil prices could be a decline in demand and a rise in production at the same time caused potentially by a withdrawal of all countries from the deal.

link do file download linkTotal OPEC output increased in June as Saudi Arabia led those gains. Source: Bloomberg

Moreover, the OPEC’s release published one day later was not reassuring as well. The report revealed that compliance of production cuts had faded to some extent as there was an increase of total output as it was mentioned earlier. Looking at the tally of countries being within the OPEC there were as much as five (UAE, Saudi Arabia, Nigeria, Libya and Angola) which pumped more compared with the prior month. Although, rises seen in Libya and Nigeria could have been expected as both countries are exempt from the deal, a noticeable increase of Saudi Arabia’s production could raise some concerns.

link do file download linkSaudi Arabia has still huge spare capacity which could be launched if there’s an incentive to pump more. Source: Bloomberg

Besides, there is even a more important issue which could be taken into account at this stage. Having looked at the chart above one could notice that even as Saudi Arabia beefed up its production last month, it has still massive room to pump more as its spare capacity amounts to more than 1.4 mbpd. In turn, OPEC’s joint spare capacity is above 4 mbpd, hence potential to ramp up output is still significant.

In addition, the International Energy Agency expressed some doubts yesterday as it had less confident on the oil rebalancing mainly owing to rises production by the OPEC. It appears that it’s unlikely that there will be no a glut of oil next year. Having said that, more persistent gains in oil prices could be contained.

link do file download linkOil rigs count increased to 765 from 758 last week. An uptrend seems to be unimpressed. Source: Bloomberg, XTB

At the end of the day, the Baker Hughes showed that a count of oil rigs in the US picked up by 2 last week. It suggests that even with lower oil prices (much below $50) there is still a sufficient incentive for US shale producers to continue drilling. That said, the long-term outlook for the global oil market remains vague, hence a range-bound trading could be the best strategy going forward.

link do file download linkOil prices have rebounded lately from a crucial local support zone placed at a round $44 level, durable gains could be contained though. Source: xStation5

Although, oil prices have come off a support recently further gains could be limited given a relevant resistance being in the offing. Should some ominous candlesticks are drawn, it could be a short-term selling opportunity. Either way, in the medium-term oil could move within a broad consolidation ranging from $40/45 to $52/55.

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