Oil Sinks As Odds of More Production Quotas From OPEC+ in December Diminish
Crude Oil has been bullish for about two months, but Novak's comments forced it to lose more than $3.50 on Friday
The global economy started slowing since the middle of last year and it has been slowing since then, which has had an affect on risk assets, such as crude Oil. A slowing global economy means less demand for energy, which means less demand for crude Oil. Given the current shape of the global economy, US WTI Oil should have been trading below $40 in my opinion, but OPEC has been holding it up on life support.
OPEC+ decided to place quotas for the participating countries, to curb production by 1.2 million barrels/day. That has prevented crude Oil from diving lower like it did in the period between 2014 and 2016. Below are production quotas put in place at the end of last year:
Thousands of barrels per day.
| Country | Benchmark | Adjustment | Quota |
|---|---|---|---|
| Algeria | 1,057 | -32 | 1,025 |
| Angola | 1,528 | -47 | 1,481 |
| Azerbaijan | 796 | -20 | 776 |
| Bahrain | 227 | -5 | 222 |
| Brunei | 131 | -3 | 128 |
| Congo | 325 | -10 | 315 |
| Ecuador | 524 | -16 | 508 |
| Eq.l Guinea | 127 | -4 | 123 |
| Gabon | 187 | -6 | 181 |
| Iraq | 4,653 | -141 | 4,512 |
| Kazakhstan | 1,900 | -40 | 1,860 |
| Kuwait | 2,809 | -85 | 2,724 |
| Malaysia | 627 | -15 | 612 |
| Mexico | 2,017 | -40 | 1,977 |
| Nigeria | 1,738 | -53 | 1,685 |
| Oman | 995 | -25 | 970 |
| Russia | 11,421 | -230 | 11,191 |
| Saudi Arabia | 10,633 | -322 | 10,311 |
| South Sudan | 132 | -3 | 129 |
| Sudan | 74 | -2 | 72 |
| UAE | 3,168 | -96 | 3,072 |
We saw a surge to $63.50 after the attack on Saudi Arabia’s Oil production and refining facilities, back in September. But, Saudi’s replaced the facilities pretty quickly, which improved the sentiment and turned crude Oil bearish again. But, in October we heard rumours from OPEC that they might decide to place new production quotas.
Those rumours helped improve the sentiment again and crude Oil has been trading on a bullish trend since then. An ascending channel has formed and moving averages have been helping keep Oil bullish, provide support on pullbacks lower. We have seen the price pierce moving averages to the downside, but the buyers have returned and the uptrend has resumed.
The ascending channel has been broken now
Although, on Friday we saw another bearish reversal down which was followed by a big decline. US WTI crude lost more than $3.50 from top to bottom on Friday and the price closed below the moving averages and the lower trend line of the channel. This is a strong sign that the uptrend might have come to an end for Oil.
Plans were that the bare-minimum cut for next week’s OPEC+ meeting was supposed to be an extension of 3-6 months beyond April On Friday. But recent comments show that OPEC+ countries have no willingness to cut production further. After all, Oil revenues are the main source of income for almost all these Oil producers.
The global economy has weakened, which has put these governments in fiscal difficulty and lower revenues from Oil exports would hurt their economies further. We heard Russian Energy Minister Novak say last Friday that he favors taking OPEC+ extension decision closer to April.
So, all the signs show that further quotas will be postponed, if ever applied. This changes the situation for crude Oil which seems to have turned bearish now. Although, we will have to see if the lower line of the channel will turn into resistance now. If it does, then the next target will likely be the support zone around $50.
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