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OPEC Output Cut Reignites Inflation SurgesNYMEX: WTI ( NYMEX:CL1! ), RBOB Gasoline ( NYMEX:RB1! ) Over the weekend, eight OPEC producers, led by Saudi Arabia, announced intentions to cut oil production by 1.16 million barrels per day through the end of the year. This adds to Russia’s existing plan to trim 500,000 barrels from February level, bringing the combined voluntary cuts of OPEC+ members in excess of 1.6 million barrels per day. This surprise announcement is a supply shock and pushes oil price to its highest level in a month. On Monday. NYMEX WTI May futures contract opened at $80.1, up 6.1%, while refined products Heating Oil (HO) and Gasoline (RB) went up 2% and 3%, respectively. Oil price hike adds to the risk of global economic slowdown. COMEX Gold is up 1% to $2,002. For a thorough analysis on gold, please read my recent writing: Oil Price Elasticities and Oil Price Fluctuations Crude oil is an inelastic commodity. When oil price goes up, the resulting decrease in demand will be less, in percentage terms. In a 2016 research paper, Fed economists found that the short-run oil supply elasticity is about 0.1 and the oil demand elasticity is about −0.1. They also found that oil supply shocks are the main driving force of oil market movements, accounting for 50 and 40 percent of the volatility of oil prices and oil production, respectively. (Source: “Oil Price Elasticities and Oil Price Fluctuations”, Caldara, Dario, Michele Cavallo, and Matteo Iacoviello (2016), International Finance Discussion Papers 1173.) Let’s illustrate this point mathematically: • Given: Revenue = Sales X Price, assuming sales = demand • When price goes up 6%, sales would change by -0.1 X 6% = -0.6% • New Revenue = (1+0.06) Price X (1-0.006) Sales = 1.05364 (Price X Sales) • The percentage of change in oil revenue is +5.4%. The economic reason behind the OPEC decision: 1) Supply shock pushes oil price up; 2) Higher price and lower production result in higher oil revenue. This explains why the US has difficulty persuading OPEC to increase production. It runs counter to their core economic interest. Investment Strategies in an Inflationary Environment US consumer price index (CPI) rebounded 0.4% and 0.5% in the first two months of 2023. Annual inflation for energy products: Gasoline (-2.0%), Fuel Oil (+9.2%), Electricity (+12.9%) and Piped gas service (+14.3%). Oil price surge raises energy cost globally, from transportation and utility to the cost of most goods and services. This adds to the uncertainly of central bank monetary policy. According to CME FedWatch, futures traders put 44.6% odds of no rate hike in the May FOMC meeting, and a 55.4% chance of raising 25 basis points. This is like flipping a coin. However, there are opportunities on energy futures, if current price trend continues. WTI Crude Oil (CL) Since last year, the Biden Administration released 180 million barrels of crude oil from the Strategic Petroleum Reserve (SPR) to fight record gasoline price and runaway inflation. According to US Energy Information Administration (EIA), crude oil stock in the SPR stood at 371.6 million barrels at the end of January. This is the lowest level since 1984. In a few weeks, the peak summer driving season will be here. This, coupled with the need to replenish the SPR, forms a strong demand basis for the remainder of the year. With demand being inelastic and the OPEC having incentive to cut output further, I could see WTI going back to the $90-100 range. July WTI (CLN3) is currently quoted $80.0 a barrel. Each contract has a notional value of 1,000 barrels. Margin requirement is $5,500 to place one contract. Hypothetically, if July futures goes up to $90, a long position in one July WTI contract would gain $10,000 (=10*1000). Theoretical return would be +81.8% (=10,000/5,500-1), excluding commission. RBOB Gasoline (RB) On April 3rd, American Automobile Association (AAA) reports that national average retail price for regular unleaded gasoline is $3.506 per gallon. This is up 6.7 cents or +1.9% from a week ago, and +11.6 cents or +3.4% from a month ago. Current price is 68.6 cents or 16.4% below year-ago price of $4.192. However, with less supply and more demand on the horizon, I expect gasoline to retest the $4 level soon. July RBOB (RBN3) is quoted $2.6575 a gallon. Each contract has a notional of 42,000 gallons. Minimum margin is $6,500. If futures price goes up to $2.9, a long position would gain $10,185 (=0.2425*42,000). Theoretical return would be +56.7% (=10,185/6,500-1). Heating Oil (HO) Heating oil price peaked during cold winter season in January. While it is a refined product, the cost of crude oil has less impact on heating oil in off-peak season. Therefore, I do not see much upside potential from current price level of $2.6665/gallon. Henry Hub Natural Gas (HH) OPEC’s output cut has no direct impact on natural gas supply. Today, HH futures went down 11.7 cents to $2.099 per 10,000 MMBtu, or -5.23%. In the U.S., about 50% of the electricity is generated from natural gas, with the remainder coming from coal and renewable energy sources. CBOT Corn Futures (ZC) Currently, up to 40% of US corn output is used to produce ethanol, a form of biofuel. Oil price surge would boost the consumption of the lower-cost ethanol, holding everything else equal. I will write a separate paper on Corn futures next month. Happy Trading. Disclaimers *Trade ideas cited above are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management under the market scenarios being discussed. They shall not be construed as investment recommendations or advice. Nor are they used to promote any specific products, or services. CME Real-time Market Data help identify trading set-ups and express my market views. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com
NYMEX:CL1!Long
by JimHuangChicago
1
Oil maintains post OPEC+ gainsAs mentioned in my previous oil update a couple of weeks ago that “the OPEC might have to cut even more production to prevent prices from falling significantly further,” that’s precisely what they did at the weekend, creating a big gap in oil prices. Oil prices eased off their highs slightly, but not by much. At the time of writing, there were approaching the overnight highs again. Where does oil go from here? Breakaway gap While gaps typically fill, they don’t always. This could be a breakaway gap in oil prices. The impact of the production cuts could send WTI to at least $85-$90 from here, before we potentially see some real weakness in oil prices again. Any short-term weakness in oil prices could prove to be bear traps, and thus may well be bought. In case you didn’t read the news, the OPEC+ blindsided the market with a surprise production cut, announced at the weekend. The group agreed to cut nearly 1.7 million barrels of oil per day. The reductions are pledged from next month through year end. Saudi Arabia is again leading the way with 500,000 barrels per day of cuts. Several other Gulf states have joined in with their curbs. Russia, who had already announced a 500k bpd through June, has now extended that through year end. The OPEC+ decision comes totally unexpected. Given that nearly 1.7 million barrels of oil per day will be held back from global supply, this should keep prices supported. In the short-term we well see some further significant gains in WTI, before the focus turns to weaker demand outlook. What about the longer-term outlook? While the OPEC+ cuts are expected to tighten the oil market and may well provide further support to prices in the near-term, the longer-term outlook remains uncertain. After all, a side effect will be a fresh inflationary jolt to the world economy. This in turn may mean even more rate increases than was priced in last week. Ultimately, a high oil price will hurt demand at a time when household and business finances are overstretched. The thing about oil demand, though, is that it is very price inelastic. So, unless something like Covid happens again, don’t expect to see a material drop in oil prices due to demand weakness. People will not stop driving or travelling by plane because of high oil prices. Therefore, demand is only likely to get hurt moderately by rising oil prices. Indeed, oil is a supply-driven market. Thus, the only way for oil prices to come under significant pressure again is if non-OPEC supply increases sharply. This is possible but will take some time for producers outside the OPEC+ to ramp up their production. So, the big risk is that this could start another supply war between the OPEC+ and non-OPEC countries such as the US and Canada.
FOREXCOM:USOIL
by FOREXcom
A Crude Awakening!The surprise production cut announcement from OPEC+ on Sunday caught us off guard! With oil prices surging close to 7%, the question arises: will this trend persist? To put the production cut into perspective, the unexpected 1.16 million barrels per day reduction is a continuation of the cuts announced last October. In total, these cuts will represent roughly 3.7% of global demand. Since it has been some time since we covered oil, let's revisit some of the factors we see affecting oil now. Strategic Petroleum Reserve First, the US Strategic Petroleum Reserve (SPR) is currently at its lowest level since 1983. The remarkable depletion of the reserve to combat energy inflation finally ended in December. How has crude oil performed since then? It has been trading relatively flat, with the recent news pushing crude back to its December peak levels. We view this as a potential positive for crude oil, as the current low SPR levels indicate that supplies cannot be easily smoothed out by artificial market forces to suppress oil prices. Furthermore, the SPR will eventually require a refill at some point, adding buying pressure. Dollar weakness As crude oil is quoted in USD, the dollar's performance greatly influences oil prices. The chart above depicts the dollar (inverted) against crude oil. Over the past 20 years, periods of dollar weakening have been associated with higher oil prices. With the recent dollar decline, we have yet to see a significant response from crude. COT Positioning Another interesting note about oil is the reduction of non-commercial long positions over the past year as oil rallied from the depths of negative prices in 2020. As long positions close, net positioning (blue) has returned to 2016 lows. The current positioning landscape presents opportunities for a renewed surge in Crude Oil if market participants re-establish their longs. Term Structure The term structure of Crude Oil remains significantly in backwardation, indicating possible demand pressures, as measured by the Dec 2023 – Dec 2024 spread as well as the Jun 2023 – Jun 2024 spreads. The news on OPEC production cut resulted in a spike in the steepness of the term structure, further emphasizing the presence of price pressures. Political Gamesmanship Last but not least, as global powerhouses China, Russia, and Saudi Arabia jockey for positions on the world stage, it's undeniable that oil plays a pivotal role in their strategic arsenal. By leveraging their influence over this vital commodity, these nations may attempt to exert pressure on the US, seeking to tip the geopolitical balance in their favor and assert their dominance in the energy market. Looking at the charts, we see crude oil struggling to break lower after completing a descending triangle. The recent gap up has now positioned Crude Oil just above the 200-day moving average and descending triangle. Combined, the stage seems set for oil’s next leg higher as the low SPR levels, dollar weakness, term structure & net positioning act as potential tailwinds to propel Crude Oil higher. We set our stops at the previous support level of 73.15 and take-profit levels at 92. Each Crude Oil Future contract is equal to 1000 barrels of crude oil. Each 0.01 point increment in Crude Oil Futures is equal to 10 USD. The charts above were generated using CME’s Real-Time data available on TradingView. Inspirante Trading Solutions is subscribed to both TradingView Premium and CME Real-time Market Data which allows us to identify trading set-ups in real-time and express our market opinions. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com Disclaimer: The contents in this Idea are intended for information purpose only and do not constitute investment recommendation or advice. Nor are they used to promote any specific products or services. They serve as an integral part of a case study to demonstrate fundamental concepts in risk management under given market scenarios. A full version of the disclaimer is available in our profile description. Reference: www.cmegroup.com www.reuters.com
NYMEX:CL1!Long
by inspirante
16
Crude Oil (WTI): Have You Seen That GAP? 🛢️ With a sudden OPEC decision to cut oil production rate, the market opened with a huge gap up. The price is currently testing a solid horizontal supply cluster. What we know about gaps is the fact that in 80% of the time they tend to be filled. I believe that sellers will push the price from the underlined resistance and initiate a bearish move. Goals will be 78.57 - middle of the gap, 75.75 - gap open. ❤️Please, support my work with like, thank you!❤️
TVC:USOILShort
by VasilyTrader
7
WTI Outlook 3 April 2023Following the surprise news from OPEC+ where the cartel decided to cut production by more than 1 million barrels a day, energy prices gapped strongly to the upside. WTI tested the 82 price level again which was at the 50% fibonacci retracement level. Typically it is believed that price would have to close the gap before continuing with the trend again. Therefore, look for WTI to retrace before trading higher again, and if price breaks above the 82 resistance level, the next key resistance level is at 93.55 Overall significantly choppy price action is anticipated on energy prices in the short term
TVC:USOIL
by JinDao_Tai
CRUDE OIL TO HIT $160!?😳The price of Crude Oil gapped 6% on market open tonight & moved up 460 PIPS😳 What a crazy move! This was caused on the back of Saudi Arabia & OPEC announcing further Oil output cuts of around 1.16 million barrels a day. This is their way of fighting back against the U.S. & punishing them. This'll create immediate price rises in the United States, then also follow into the U.K.📉 I did warn you guys that this PLANNED Oil shortage & price rise will be next pandemic! This is what will force the everyday person to start switching to electric vehicles.
TVC:USOILLong
by BA_Investments
WTI - GAP CORRECTIONThe Biden administration said the surprise oil output cuts announced on Sunday by Saudi Arabia and other OPEC+ countries were not advisable. The west is not excited by the price development and we can expect an answer to keep the black gold in a reasonable range. Mid-70s is working well to reduce inflation and keep the economy running, that's why a logical move is to boost production supply as a corrective measure. Risk Disclosure: Trading Foreign Exchange (Forex) and Contracts of Difference (CFD's) carries a high level of risk. By registering and signing up, any client affirms their understanding of their own personal accountability for all transactions performed within their account and recognizes the risks associated with trading on such markets and on such sites. Furthermore, one understands that the company carries zero influence over transactions, markets, and trading signals, therefore, cannot be held liable nor guarantee any profits or losses.
NYMEX:CL1!Short
by legacyFXofficial
1
Crude could fall even lower without OPEC intervention • Oil prices remain under pressure despite receding banking fears • Major technical breakdown suggests more losses could be on the way • Will the OPEC come to the rescue? After falling by 8% at one point, crude oil prices managed to bounce back from their worst levels on Wednesday along with everything else. The rebound came on the back of news the Swiss National Bank offered a $54 billion lifeline to Credit Suisse. The move has helped calm fears of a financial crisis in Europe. But there wasn’t much immediate follow-through in the markets this morning ahead of the European Central Bank decision. Crude oil also turned lower. Risks, therefore, continue to remain to the downside for oil prices. Oil prices have been weighed down by at least three major factors in recent days: 1) general risk-off sentiment, 2) weaker demand projections for oil and 3) technical selling. Given that prices had been stuck inside a corridor for a long time – since early December to be exact – a major move was going to follow. The fact that we have now had a bearish fundamental trigger – a sharp rise in financial stability risks – to move prices outside of their ranges to the downside, meant that technical traders have also helped to add pressure on prices by selling oil futures short to take advantage of the momentum. The three-month consolidation has been resolved by prices moving and closing below the support level of the sideways channel. This should keep the “sell-the-rallies” trade intact until something changes fundamentally. The impact of very high levels of inflation over the past couple of years has been hurting consumption, while the significant interest rate tightening by central banks have further reduced consumer and business buying power. Indeed, the International Energy Agency is forecasting that global oil supply will “comfortably” exceed demand in the first half of this year. The IEA reported that commercial oil stocks in developed OECD countries hit an 18-month high. Oil prices also remain weighed down by higher-than-expected inventories. The EIA, meanwhile, posted a 1.6-million-barrel rise in US crude stockpiles last week, which was more than forecast. So, all this begs the question: will the OPEC step in to save oil prices again by cutting its production? The balls in their court now, but for now, thanks to the big breakdown, the path of least resistance is clearly to the downside for oil. Granted, we might see an oversold bounce in prices soon. But until something changes fundamentally to create a higher high for oil, we would continue to favour selling into resistance than fading the dips. For Brent, the next potential downside target could be $70.00. Stop-loss orders of many bullish traders would now be resting below Wednesday’s low at $71.36. If they get tripped, which we think is likely, the next stop could well be that $70.00 mark. That’s not to say oil cannot go much lower than that. But that’s our main downside target in the short-term outlook. On the upside, key resistance is seen between 75.00 to 76.60, an area which was previously support. Bullish traders will want to see oil go back above this area to regain control again. -- Written by Fawad Razaqzada, Market Analyst Follow Fawad on Twitter @Trader_F_R
FOREXCOM:UKOILShort
by FOREXcom
OPEC in the news: Hike or hype?OPEC's latest Monthly Oil Market Report (MOMR) shows crude oil production reduced by 49,000 barrels per day (BPD). That put the output down to an average of 28.8 million BPD in January, and this is part of a 156,000 BPD reduction by Saudi Arabia. How will the markets react? Everybody has a quick answer to that question. Oil supply & demand Anyone trading oil will tell you—whenever production is cut, the supply & demand dynamic changes and crude prices go up. And not long after, commuters everywhere feel a pinch at the pump. Is it about to happen again in 2023? In 2017, OPEC and non-OPEC members extended cuts in oil output to the tune of 1.8 million BPD. Supplies dwindled, and nations paid excessive prices throughout 2017. The whole world knew it was coming. Demand was high, and oil prices rocketed from June’s $42 (USD) up to $66. OPEC’s mission to inflate prices succeeded. Fast forward to 2020. Crude prices crash to 1999 prices in Q1. Dropping from $63 per barrel down to a shocking $14.00, OPEC’s stakeholders demanded action. OPEC cut overall crude oil production by a massive 9.7 million BPD between May and June of 2020. The reasoning was said to be an attempt to reduce the global oversupply with hopes of firming up depressed oil prices. What followed was epic. April 2020. The production cuts catapulted crude prices into a 2-year rally, rising to an extortionate $110 per barrel in May of 2022. The massive production cut not only improved OPEC’s revenue, it spiked to a ten-year high. The new prices provoked governments everywhere, and political pressure followed. It’s 2023, and here we go again… or not. All the main media channels made the oil cut announcement, as though it was a major move by OPEC. But there’s nothing major about it, and traders should be cautious. The Oil hike hype When the news was first released that OPEC would cut production, thousands of traders and financial journalists jumped on the story… likely with the expectation of bullish times ahead. Saudi Arabia’s energy and industry oil minister, Khalid Al-Falih said, “We considered various scenarios, from six (months) to nine to 12 and we even considered options for a higher cut... All indications are solid that a nine-month extension is the optimum and should bring us within the five-year average by the end of the year.” Five-year average! The 13 member countries have a near total monopoly on oil prices, and the world always needs more. OPEC has the ability to set the price at almost any level by pinching the supply chain, but there are limits that could provoke intervention or invasion, so OPEC usually tries to be reasonable. OPEC's charter is to keep oil prices at a 5-year average… the current price stabilization agreement. But the average for the last 5 years is $67 per barrel. At the time of writing, crude is at $78 per barrel. Above the average. Hardly a justification for a new production cut. But is it really a production cut, or just a modification blown out of all proportions? Media hype doesn’t match the math Every major financial media outlet is on oil right now. Big brand news sites are even throwing around the number “$100 per barrel” in the coming months. That might be a powerful motivator to get investors and traders to buy in. But before you do, consider the numbers again. A 1.8 million barrel cut added $24 to the price of crude. A 9.7 million barrel cut added $93 to the price of crude. So for every 75,000 - 100,000 BPD cut, the price of crude increased by $1. Now consider that the latest cut was only 49,000 BPD, with a target cut of 156,000 BPD. Mathematically, such a supply cut should have very little impact on today’s volatile prices, if any at all. And don’t forget Nigeria and Angola have increased production by 112,000 BPD, softening the supply flow shortage considerably. Conclusion When it comes to trading, don’t always believe the hype, no matter how legitimate the sources are. All this media hype will affect market sentiment and pump the price, but without any real fuel behind the rally, it will likely be short-lived. Oil prices are pushed and pulled by so many sources of influence. From the economy to politics, and corporate profit, there’s a lot to follow, so stay updated with the coming fundamentals before you consider trading oil.
TVC:USOIL
by Exness_Official
OPEC & The West Battling Over Oil Price. Who Wins?OPEC (and non OPEC members) are battling with the West led by the US over oil price. While the West wants oil price to hover around $60/barrel, OPEC and other oil producing countries led by Russia and Saudi Arabia feel no one should dictate the price of their commodity... With oil price now sitting on important support level, will the price breaks down to go lower OR there will be a reversal to and price start to move high? Technically, bulls came into the market early last week; drove the price high but bears later joined the market and brought price a little down. Coming week(s), if more bulls came into the market, then oil price will likely go up. Otherwise, if bears are more prominent in the next 1 or 2 weeks, then we might witness more decline in oil price. N.B - Let emotions and sentiments work for you -ALWAYS Use Proper Risk Management In Your Trades
TVC:USOIL
by BullBearMkt
Supply risks point to higher oil pricesOil prices were whipsawed this week with swings of more than 6%1 after a report from the Wall Street Journal suggested that Organisation of the Petroleum Exporting Countries (OPEC+) is looking to possibly increase output by 500,000 barrels per day (bpd). The rumour could have easily been justified by President Biden’s decision to offer sovereign immunity to the Saudi Crown Price Mohammed bin Salman in a civil lawsuit, as geopolitics could influence decisions. However, the Saudi’s shortly denied the report that OPEC+ was not considering an output increase, helping oil prices claw back losses on the day. This makes logical sense, given that OPEC+ reduced its oil production noticeably since the beginning of November, in accordance with its early October decision. The price action on 22nd November goes to show that it takes only a small amount of movement in trades to cause a large price effect in oil. The oil market remains susceptible to further volatility amidst a backdrop of low liquidity into year end. Looking ahead, the oil market remains vulnerable to a number of key events starting with the OPEC+ meeting on Dec 4 followed by the European Union (EU) embargo on Russian oil alongside G-7 plans to launch a price cap on Russian crude sales on Dec 5. Price cap on Russian oil is hardly bearish Expectations are that the G-7 will soon announce the level at which they intend to set the price cap on Russian oil. The latest reports suggest a cap of US Dollar 65-70 per barrel, which would be well above Russia’s cost of production. Russia is already selling its crude at a significant discount, so a cap at these levels would likely have minimal impact on trading and inflict minimal harm to Russia. Russia’s Deputy Prime Minister Alexander Novak has once again made it clear that Russia will not supply crude oil or refined products to countries which follow the G-7 price cap. In fact, oil will either be redirected to those nations who choose to ignore the price cap or Russian output will be reduced. This appears to be more supportive for higher prices. So far, EU diplomats are locked in negotiations over how strict the Russian mechanism should be, after Poland and Greece rejected the proposal. They would prefer to see a cap closer to the cost of production at US$30. EU leaders are now expected to seek a deal at a 15-16 December summit, in follow up to the energy minister meeting this week on 24 November. EU embargo on the import of Russian oil is approaching fast. This comes into effect on 5 December for crude oil and 5 February 2023 for oil products. In the last three months, Russia has remained the largest external supplier of diesel to the EU, delivering 540kbd2. According to IEA estimates, the EU was still importing 1.5mbd of Russian crude oil in October, which corresponded to just under 15% of total EU crude oil imports. In the coming months, the EU will need to find alternative suppliers. Replacing these supplies is not going to be easy. Russia will need to find other buyers leading to further uncertainty on the oil markets. India, Turkey and China have increased their purchases of Russian oil, thereby enabling Russia to continue exporting large quantities of oil. Weak demand dominating sentiment on the oil market Oil prices are down nearly 35% from its peak as sentiment remains dominated by concerns over weaking demand as the global economy enters a recession alongside an unprecedented release from the US Strategic Petroleum Reserve (SPR). Net speculative positioning in WTI crude oil futures is more than 1-standard deviation below the 5-year average underscoring extreme bearishness on the oil market3. Its worth noting that speculative positioning in oil was on a downtrend prior to the peak in oil prices. That indicates for one investors were probably taking profits on earlier holdings and higher volatility in oil market kept buyers at bay. Although in a severe recession, oil demand can decline sharply, we are anticipating a much shallower recession for both the US and Eurozone economy. In the middle of the year, China’s oil demand was hit severely by lockdown restrictions, with demand falling below April 2020 and 2021 levels by 1-2mbd4. Although their remains uncertainty about China re-opening, we expect oil demand to recover from Q2 2023 onwards and accelerate towards year end. This should help oil demand from China grow in contrast to the prior two years. Conclusion: The oil market still seems structurally undersupplied over the next few years. The International Energy Agency (IEA) assumes by the end of Q1 2023 oil production will be 2mbd lower than prior to the invasion of Ukraine. We expect the Chinese re-opening, Russian supply risk, the end of SPR releases and lower levels of investment in the energy sector to contribute to a tighter oil market in 2023.
NYMEX:CL1!
by aneekaguptaWTE
2