November 26 , 2017
Last week oil closed at 58.95, up 2.24 for the week. Oil has now pushed up through its Key Resistance level, and if it can close next week above 60.00 that would be bullish. On Thursday this week OPEC and Russia are meeting to decide whether or not to extend the quotas which a currently set to expire in March’18. The market is fully expecting that the quotas will be extended to the end of 2018. Should the Russians bock at an extension,we would see the price of oil hit.
The oil price has been rising on expectations and rhetoric from OPEC that they are meeting all their quota targets. But what the mainstream media never does is actually look at the data. Here is a chart from OPEC’s own Monthly Oil Report. In their published report it clearly shows that production rose by 88.5 kb/d (lower right hand corner). OPEC’s official production quota is 32.111 mb/d, but their own data shows that they produced 32.659 mb/d in August, 32.748 mb/d in September, 32.589 mb/d, and in October. So while they tell the mainstream media that they are all compliant, their own report shows that they exceeded their quotas in August, September, and October.
Due to the hurricanes, much of the data over the last month was skewed, and we should start to see cleaner data over the next week or two. One thing we do know is that based on seasonality, we are now in the fall shoulder season, where supply tends to far outweigh demand, resulting in oil price weakness through to December.
There are four important Support and Resistance levels to keep your eyes on:
- Near-term Resistance sits at 60.00
- Key Resistance sits at 65.00
- Near-term Support at 52.00
- Key Support sits at 42.00
Bullish scenario: Should oil close this week and hold above the 57.00 level, it would be very bullish, and suggest we could see 60.00 oil by the end of the year.
Bearish scenario: If oil breaks down below 52.00, it will be very bearish, and suggest we will see 42.00 oil Q4/17 – Q1/18.
Our current forecast: Based on supply and demand, and given that we are now ending the summer driving season, our models favour the bearish scenario and are calling for sub 50.00 oil starting in December, with the ultimate low likely in the 35.00 range in Q4/17 – Q1/18.
While OPEC and some non-OPEC countries promise to cut production, most non-OPEC countries, with the US leading the way, are ramping up production. The following chart is from the International Energy Agency (IEA) and shows how the US production has climbed to 9.658 mb/d, a new all-time record high.
Note on the following chart that current US inventories are more than 110-150 million barrels higher than the top end of the historic “normal range.”
Not only is the US ramping up production, they are also pouring money back into explorations. There are now 738 rigs operating in the US, up over 121% from the January 2016 low of 334.
There are many supply and demand factors that affect oil prices. Reports on production/supply and demand are reported regularly by the mass media, and it is that reporting that most investors base their decisions as to where the price of oil is headed.
The problem for the mass investors and most hedge funds is that while they must wait for these reports and forecasts to be published, the large producers and merchants have already acted on the data. These large producers and merchants are the source of most of this data, so they know the numbers before they are published.
The reality is that while the mass investors and hedge funds simply do not have the capacity or contacts to access this data in a timely fashion, there is a way we can see what the large producers are doing with the data they have. We can watch what these Commercial Insiders are doing by looking at the Commitment of Trader (COT) data.
On the COT chart below, the Commercial Insiders are the red line, while the Large Speculators are the green line. As we zoom in we can see that the Commercials have been massively selling to the Large Speculators. In fact, the Commercial Insiders are currently coming off the most bearish net short position EVER! At the same time the Large Speculators are coming off their most bullish net long position EVER!
The last time we had a spread this wide oil had a severe corrections (red arrow).
The bottom line is there is a glut of supply versus demand. Add in the record levels of speculative extremes, combined with the risk of OPEC members failing to comply with their quotas, the potential for a plunge in prices is much higher than most investors are prepared for.
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