Markets get caught out as the Energy Ministers Saudi Arabia and Russia announce they will extend the OPEC-led output cuts by nine months to March 2018.
In shades of the ECB’s Mario Draghi, the energy ministers of Saudi Arabia and Russia announced, in Beijing no less, that they had agreed to do “whatever it takes” to reduce global oil stockpiles to five-year averages this morning. Taking the big bazooka of the wall, they jointly announced that the OPEC-led production deal would be extended by nine months until March 2018. Also, they hoped that additional producers would join them in cutting when the extension begins in June.
Although the actual meeting for OPEC and NOPEC isn’t scheduled until May 25th, the timing of this announcement from the largest producer and the largest exporter (25% of global production between them), was a complete surprise and probably a testament to two things. How worried they are about the rise of U.S. shale’s increase, now at 9.3 million barrels per day (BPD), and it’s very detrimental effect on their national finances. And two, their determination to take the bull by the horns and set their oil price marker down early. It is perhaps most significant from the Russian side as it took them a tardy three months to even get near their paltry cut allocation of 300,000 BPD this year. Clearly, reality is biting and neither country likes what it sees in the future should the status quo continue.
Both Brent and WTI shot up over 1.60% immediately after the statement and on a spot basis, continue to trade near their day’s highs at 51.35 and 48.50 as I write. When cooler heads later in the day look a bit harder, they will probably notice that even extending the deal in its present form will only keep the lights on in reality. With the rise of U.S. shale, Nigeria and Libyan production, the supply deficit globally is only at 200,000 BPD. Hardly likely to bring a cold sweat to oil bears. OPEC’s forecasts still rely on global growth increasing to pick up the slack. Nevertheless, the cynic in me aside, the intent is most certainly there, and this should imply firm oil prices into the European session. Looking at the technicals…
Brent spot has initial resistance at 51.50, its day’s high with significant resistance at the 52.50 regions.
It has broken its 200-day moving average at 51.23, which is initial support, with the day’s low at 50.50 behind that. A close above the 51.23 this evening would be constructive technically.
WTI spot’s high today at 48.60 is initial resistance. The key level is just above at 49.00 which is a double top and the 200-day moving average. A close above here could imply a test of 50.00 and the 100-day moving average at 51.00.
Support is at the days low around 47.65 and then 47.10.
Whether this is an act of desperation or a new found solidarity between the two big dogs of global oil, what cannot be doubted is the intent. And that appears to clearly be to make sure crude stays above 50 dollars a barrel. It has created some very constructive price action in both contracts from a technical perspective. Whether this will have longevity into the 2nd half of 2017 will be a story for another day.
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