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Crude Oil Prices Drop as IEA Stokes Bets on Swing Supply Boost

Crude Oil Prices Drop as IEA Stokes Bets on Swing Supply Boost

2017-01-19 05:32:00
Ilya Spivak, Head Strategist, APAC
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Talking Points:

  • Crude oil prices drop as IEA’s Birol talks up supply gains
  • Gold prices drop on hawkish Kaplan, Yellen commentary
  • Technical positioning hints gold, crude oil may be topping

Crude oil prices slumped after IEA Executive Director Fatih Birol said that output from US shale producers will “definitely react strongly” to recent price gains. He added that Brazil, Mexico and China will also bring more crude to market, making for “lots more” supply in the second half of this year and early 2018. The remarks dovetail with recent skepticism about lasting support from OPEC’s supply reduction deal.

The WTI benchmark rallied as the cartel and several high-profile external suppliers (notably Russia) improbably agreed to a coordinated production cut late last year. Now, a number of key officials including Saudi oil minister Khalid Al-Falih are saying the scheme probably won’t be extended beyond its initial six-month. Meanwhile, top producers are said to have announced the bulk of their cutback commitments.

All told, this may mean that whatever support was to be had from the OPEC deal is already priced into the market. On the other hand, there seems to be ample room for investors to onboard still forthcoming evidence that swing producers in North America and elsewhere have ramped up output in response to higher prices. Within that context, Mr Birol’s comments speak directly to concerns already at the forefront.

EIA weekly inventories flow data now enters the spotlight. An increase of 128.4k barrels is expected. An analogous report from API pointed to a more dramatic 5.04 million barrel drawdown however. If the official data set hews closer to the private-sector estimate, prices may find a bit of a lifeline. Continued commentary from the sidelines of the World Economic Forum in Davos may muddy the waters however.

Gold prices fell as the US Dollar rallied alongside Treasury bond yields, undermining the appeal of anti-fiat and non-interest-bearing assets. The move followed hawkish comments from Dallas Fed President Robert Kaplan, a voter on this year’s FOMC committee, and Chair Janet Yellen. Scheduled event risk thins out in the day ahead, which may leave room for a corrective drift upward.

Will gold and crude oil prices continue to rise in the first quarter of 2017? See our forecasts here!

GOLD TECHNICAL ANALYSISGold prices put in a bearish Dark Cloud Cover candlestick pattern, hinting a top may be forming. A move below resistance-turned-support at 1199.80 opens the door for a test of the 14.6% Fibonacci expansion at 1182.06. Alternatively, a push above the 38.2% Fib retracement at 1219.20 exposes the 1248.98-50.65 area (50% level, June 24 low).

Crude Oil Prices Drop as IEA Stokes Bets on Swing Supply Boost

CRUDE OIL TECHNICAL ANALYSISCrude oil prices may be carving out a bearish Head and Shoulders chart pattern. A close below the 50.25-69 area (38.2% Fibonacci retracement, January 10 low) could confirm the setup, exposing the 50% level at 48.72 as the next downside barrier. Alternatively, a move back above a horizontal pivot at 52.44 targets the 23.6% Fib expansion at 53.75.

Crude Oil Prices Drop as IEA Stokes Bets on Swing Supply Boost

--- Written by Ilya Spivak, Currency Strategist for DailyFX.com

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