With just weeks until the semiannual meeting of OPEC members in Vienna, a shaky output cap deal remains the looming risk factor for oil prices that refuses disappear. Assurances from members aside, OPEC’s production continues to expand, rising to 33.640 million barrels per day in September and climbing to 33.820 million bpd in October.
The question remains as to how much each member will have to cut to meet the 32.500 million bpd targeted by the accord forged in Algeria.
Producers may ramp production adding to oversupply
Discord remains unresolved, with the Gulf countries feeling the heat to cut production while other members largely maintain output. Despite several countries receiving exemptions, other countries are even questioning the math.
Furthermore, outside OPEC members, rising production from Russia alongside growing hedging by American producers suggests that any OPEC output cuts would be soaked up by other players. Considering the circumstances, the unstable foundation for the Algeria deal remains an impediment to any sustainable floor in oil prices.
Shrinking Common Ground
Despite ongoing working sessions to create a meaningful deal to help reduce oil oversupply, many factors stand in the way of OPEC progress. Looking at the membership in particular, several nations will be exempted from cutting output.
Ongoing conflicts and economic factors will see Nigeria, Libya, and Iran caps set at 2016 highs, giving the economies room to recover. Still, the generous treatment for these members has drawn the scorn and envy of others.
The GCC nations are especially concerned, believing that they will be the predominant source of output cuts. Any participation in such a deal may see them lose market share. Iraq has also pleaded to be excused from production cuts as the nation embarks on a showdown against IS forces in Mosul.
Few catalysts short of war could lift oil prices
While all OPEC members are especially willing to reap the rewards of higher oil prices, none seem excited about taking concrete steps to reach that end. In the meantime, the absence of common ground aside from the price issue remains a significant stumbling block, forcing oil prices lower.
The group that has reaped the biggest benefits from the latest OPEC deal chatter are the US producers looking to hedge. According to a report on October 24th, short positions held by commercial producers and merchants was at the highest point since 2007, underscoring the demand to lock in profits.
Unworried about another imminent price dip, producers can ramp production higher or restart shuttered projects, adding to oversupply.
With US production rising to 8.504 million barrels during the week ended October 21st accompanied by an oil rig count that has risen 22 of the last 23 weeks, shale drilling is swiftly reemerging from hiding.
Outside of the United States, Russia has continued to take its own production higher, thinking that at most OPEC will request an output cap, not an output cut.
However, with no enforcement mechanism in place, Russia may seek to continue increasing its daily production while other producers relinquish market share after hitting a post-Soviet record of 11.180 million bpd in output.
Contemplating these factors, there remain few catalysts short of war which could imminently rebalance the market and lift oil prices.
Looking at crude oil prices from a technical perspective, the latest acceleration lower in prices might not be concluded. For one, the Relative Strength Index remains above the 30.0 oversold level, indicating that momentum might not peak.
Second, the 50-day moving averages is currently keeping a lid on upside as evidenced by the earlier test of the 50-DMA before prices reversed lower.
However, despite the room for oil prices to fall further, there are several supportive factors that may prevent an all-out collapse. For one, the 200-day moving average neatly coincides with an important support level at $43.06. A cross of this threshold could indicate that upward trend forming from August could be breaking down, but it could prove a challenging level.
Before testing support that converges with the 200-day moving average, crude must first see if the lower bound of the emerging equidistant channel formation holds up.
While potentially an ideal opportunity for a bullish trader to capitalize on the pattern by targeting the upper channel line, a candlestick close below the lower channel line could signify a breakout move.
Should the move be accompanied by higher trading volumes and momentum, it could be the beginning of a $5.00-6.00 point leg lower based on the existing channel range.
On the upside, the barrier remains at resistance of $51.51. Taken in the context of the June peak, it could indicate a double top formation in prices, which is typically interpreted as a bearish signal.
Unless a consensus is found leading up the official OPEC Meeting scheduled for November 30th and concrete steps are taken towards output cap enforcement, oil prices are likely to continue to find themselves under pressure with limited room to run to the upside.
Sustained argument over who will bear the brunt of the proposed output cuts may unravel any salvageable deal. Additionally, with other major producers using rising prices as an opportunity to expand production and hedge prices, any reduction from OPEC may prove meaningless to rebalancing the market.
Considering the current dynamic, risks for prices remain firmly to the downside unless OPEC is really able to form a grand bargain.
Idan Levitov is the VP trading for anyoption.com. He is a seasoned professional with years of experience trading and has a vast knowledge of the financial markets. An expert in the binary options hedging field – Idan provides insights, guidance and coordination in business planning, risk management and technology strategies.