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Crude Oil Analysis: Oil Prices Most Overbought Since Q4 Crash

Crude Oil Analysis: Oil Prices Most Overbought Since Q4 Crash

2019-04-10 08:05:00
Justin McQueen, Analyst
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Oil Price Analysis and News

  • Oil Prices Gain Amid Rising Geopolitical Premium
  • WTI Crude Outperformance Over Brent Crude
  • Oil Waiver Extension Raises Prospect of Pullback

Oil Prices Gain Amid Rising Geopolitical Premium

In recent sessions crude oil prices have been edging higher with Brent crude futures most recently hitting a 5-month high having topped $71/bbl. This is largely unsurprising given that bullish catalysts continue to remain intact for oil prices despite the fears that global growth is slowing with the IMF yesterday cutting their forecast to the lowest since the financial crisis.

Oil sanctions on Iran and Venezuela continue to cripple oil supply in both nations with the latter likely to see supply south of 1mbpd with no end in sight for supply disruptions. While for Iran, tensions stepped up yet again after the US designated Iran’s Revolutionary Guard as a foreign terrorist group. Elsewhere, the latest catalyst to propel oil prices higher had been due to the escalation of fighting in Libya. Although oil supply and exports have yet been impacted, it has been enough to take crude oil to 5-month highs. Alongside this, union strikes at Shell’s Pernis refinery (largest in Europe, with a capacity of 404kbpd) have also added to the bullish sentiment with Shell stating that 65% of output will be impacted.

WTI Crude Outperformance Over Brent Crude

However, what is perhaps more surprising is that much of the gains have been seen in WTI as opposed to Brent, which in turn has seen the WTI/Brent narrow to $6.60. Some reasons for this had been due to the most recent Genscape cushing figures reporting a sizeable drawdown, while the WTI curve had also moved into backwardation. Although, given yesterday’s larger than expected build in the API report (4.09mln vs. Exp. 2.3mln) eyes will turn towards today’s DoE crude inventory report.

Oil Waiver Extension Raises Prospect of Pullback

As it stands, oil prices are now the most overbought (on RSI) since the Q4 crash which may signal that upside may be somewhat stretched, particularly as oil continues to move into President Trump’s tweeting zone, while the expiration of the current oil waivers draws closer (expiration early May). Currently, Japan and India have reported that they have halted their purchases of Iranian crude for May as they await further clarity on Iran oil waivers. If indeed the Trump administration allow for an extension, this could moderate the upside seen in oil. However, with Trump’s determination to bring Iranian exports to zero, a decision to not offer an extension could see the next wave of buying in in crude with a move towards $75 on the cards, provided Brent breaks above resistance at $72.50.

BRENT CRUDE OIL DAILY TIME FRAME (AUG 2018 – APR 2019)

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Oil Impact on FX

Net Oil Importers: These countries tend to be worse off when the price of oil rises. This includes, KRW, ZAR, INR, TRY, EUR, CNY, IDR, JPY

Net Oil Exporters: These counties tend to benefit when the price of oil rises. This includes RUB, CAD, MXN, NOK.

More Reading

What Traders Need to Know When Trading the Oil Market

Important Difference Between WTI and Brent

--- Written by Justin McQueen, Market Analyst

To contact Justin, email him at Justin.mcqueen@ig.com

Follow Justin on Twitter @JMcQueenFX

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