Thursday, February 18, 2016
Crude Oil traders are keeping a close eye on a meeting between leaders from OPEC and non-OPEC Oil producing nations to discuss output. An agreement between members of the cartel with outside nations would mark the first such agreement in 15 years. What had many market observers surprised was the change of heart from Iran, which was previously against such measures. While Iran made no mention of possible production cuts, the country's Oil Minister Bijan Zanganesh stated he supported a production ceiling. Russia and Saudi Arabia, the largest producers attending the talks, agreed to freeze output at January levels instead of cutting production. This was disappointing news for many of the leaders who had gathered in Doha, Qatar, as they had hoped for a production cut to stabilize prices.
The change of heart by Iran was surprising, to say the least. The country has increased its output by at least half a million barrels a day so far in 2016. Iran has been hesitant to cut its own production in light of sanctions being lifted recently. Tehran pointed the finger at other OPEC nations, who had increased their output in recent years, as the cause of the low Oil prices. This may make traders skeptical over how supportive Iran truly is of a potential deal. Likewise, traders could be hesitant to believe that Russia will keep up with its end of the deal. Russia reneged on a similar deal in 2001, which was the second year of Vladimir Putin's first tenure as President. The country also failed to hold up its end of the bargain during the Yeltsin regime.
Traders are looking for another weekly build in Cushing, Oklahoma Crude Oil inventory levels. It is the world's largest storage facility, holding approximately 60 million barrels of Oil, or around 12% of the US supply. There are fears that the facility is getting close to capacity, which could cripple the nation's production. Those fears may be unfounded. While it is true that the facility is estimated to be between 70-80% capacity, adding additional storage in the area should not be difficult. Overall, traders are looking for a build of between 3-3.5 million barrels of Crude Oil on today's EIA inventory report.
Outside markets have been a mixed bag for Crude Oil. The US Dollar Index has seen a small rebound in recent sessions, which may put a bit of pressure on Crude Oil prices in the near-term. The S&P has also seen strength in recent sessions, offsetting some of the negative currency pressure on Oil. The S&P looks as though it may be nearing a double bottom on the daily chart, which may lead to optimism spilling over into the Oil market.
Turning to the chart, we see April Crude Oil close to confirming a double bottom, which could offer the market some momentum. Prices closed just below the 50-day moving average. A close above the average could give the Oil market momentum in the medium-term. The chart shows plenty of congestion on the upside, with some resistance coming in near 35.00 and more significant support around 38.15. A solid close above 38.15 could give a potential rally legs.
Rob Kurzatkowski, Senior Commodity Analyst