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Crude Oil Price Forecast: Exemption Seekers Produce Sellers

Crude Oil Price Forecast: Exemption Seekers Produce Sellers

Tyler Yell, CMT, Currency Strategist

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Talking Points:

  • Crude Oil Technical Strategy: Break Of Triangle Support ($51-$49/bbl) Keeps Focus Lower
  • OPEC- & Non-OPEC Members seeking an exemption from the cut puts more pressure on Saudi
  • Crude Oil near 4-week lows could accelerate as USD firms, and OPEC deal seems improbable

Oil Bulls had a frightful start of the week that may continue through November. OPEC talks that included informal discussions with non-members seemed to take OPEC further away from an accord as reports surfaced of other countries wanting to join in and forego the production cut. The countries wanting to join the exemption if there is a deal has increased from Iraq & Iran to now include Libya and Nigeria.

If the deal is still a go, this would mean the remaining members who agree to cut production would now likely have to cut more than originally anticipated to make an appropriate dent in Oil supply for the deal to be worthwhile. Many market participants expect Saudi to carry the brunt of the extra supply cut given that they produce ~31.3% of Oil from OPEC and the second and third largest producing countries are wanting an exemption.

Interested In a Quick Guide about OPEC, Click Here

A simple return to collegiate economics will help you see why this deal is so incredibly difficult to obtain. Oil production, as opposed to services, is known as a perfectly competitive market. In a perfectly competitive market, the offered product does not differ from one producer to another. There is not a Monopoly or Oligopoly as there use to be when the Cartel was created thanks in large part to Shale. Without the pricing power or belief in pricing power, giving up production is simply handing business to your competitors.

The main identifier of a perfectly competitive market with a homogenous product is that maximum profit is achieved when optimal production or output is reached where marginal revenue is equal to marginal profit. This quantity amount, known as Q*, will maximize profit for the producer. Given the homogeneity of the product, if one producer pulls back, the market will simply shift to buying from another producer (i.e. those seeking exemptions or unwilling to play ball.)

H4 Crude Oil Price Chart: Next Support Zone From Mid-September Identified As Crucial For Trend

Chart Created by Tyler Yell, CMT Courtesy of TradingView

Crude Oil has retraced half of its rally from mid-September that started at $42.72/bbl and went as high as $51.92/bbl in mid-October on DoE inventory data after the OPEC deal seemed a lock-in. A 50% retracement is still acceptable in an uptrend, and you can see above that we’re above the trendline drawn from the February low and connected off the July & September low.

The trendline currently aligns with the 61.8% retracement of the September-October range. The zone has been highlighted on the chart above and encompasses the first trend correction in September between $46.53-$44.32/bbl. If the price can hold above this zone, then Bulls can remain confident albeit hurt by the ~ 13% corrective move. However, if the price breaks below this zone of support, we will likely see a much deeper correction.

We recently shared in a previous note that we would wait to turn Bullish until we observed a break above structural resistance of the presumed-corrective moves lower at $50 and $51. Until the break of resistance surfaces, we’ll be anticipating a move down toward $47.12/bbl. The burden of proof is now on the Bulls, and we’ll continue to doubt their arguments if the price of Oil to fails surpass $50-51/bbl before anticipating new 15-month highs anytime soon.

Key Levels Over the Next 48-hrs of Trading As of Monday, October 31, 2016


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