Written By: Richard Koch – Forex Focus
Three reasons why WTI crude-oil futures will likely skid below $60 per barrel
WTI (West Texas Intermediate) crude-oil futures slipped after failing to breach the more than four-year highs of $66.66 per barrel set in January of this year. Although crude prices were higher by 7.5 percent at $64.94 per barrel at the end of March of this year, the near- to medium-term outlook may not be very bullish, as a host of fundamental factors coupled with technical indicators are pointing to a breakdown in the current rally over the next few weeks.
Before we get to the broader causes, let’s take a look at the key headlines dominating world news that have impacted crude prices in the recent past—along with the Energy Information Administration’s (EIA’s) inventory data, which was announced on April 4—beginning with the widely criticized decision by the Trump Administration to levy tariffs on steel and aluminium imports.
The pronouncement did not only not go down well with US allies, but most of the nations across the world threatened to levy tariffs of their own against imports from the United States in addition to taking the issue to the World Trade Organization (WTO). The United States, however, skipped levying tariffs against Canada, the largest exporter of steel to the US, and Mexico.
In a retaliatory move, China imposed tariffs on 128 US products, and with the US threatening tariffs on additional products imported from the Asian country, the ongoing trade war has not only affected global stock markets but has also led to a fall in the price of crude as investors look for safe-haven assets such as gold to park funds until the crisis abates. With the ongoing trade war taking precedence and other countries lined up for retaliatory measures, the EIA inventory data released on April 4, showing a drawdown in crude and gasoline stockpiles by 4.6 million and 1.1 million barrels respectively for the week ending March 30, did not have the kind of impact on crude prices that it usually has.
Highlighted below are three reasons for crude oil to pull back from current levels:
- Simmering down of global conflicts
Oil prices generally spike in the event of wars or conflicts, which are consistent with the Middle Eastern region for the past few years. However, in spite of the ongoing conflict in Syria and the rising tension between GCC (Gulf Cooperation Council) countries and Israel on the one side and Iran on the other, none of them are making headlines as the media is more focussed on other global economic and political events. Even the escalating strain between North Korea and some of its immediate neighbours seems to have simmered down after North Korea’s leader, Kim Jong-un, agreed to open talks with the United States, and President Donald Trump agreed to meet the Korean leader in May of this year, according to sources.
- Record crude production in the US
Rising crude-oil production in the US is another factor putting a lid on crude prices. According to the recent EIA data, US oil production rose to 9.3 million barrels per day in 2017, a 5-percent increase year-on-year, and is expected to rise steadily going forward. Earlier last month, crude production in the country rose to a record 10.4 million barrels per day, beating the previous record of 9.6 million in 1970, driving the EIA to up the US crude output forecast for 2018 by 300,000 to 10.59 million barrels per day. Added to that, the US, which until recently was a net importer of crude oil, has swiftly turned into a net-exporting country, gradually capturing market share from the countries representing the OPEC (Organization of the Petroleum Exporting Countries).
- Technical correction
On the charts, WTI crude continues to remain in a long-term uptrend following the 13-year lows set in February 2016. However, the secondary trend, which generally lasts from three weeks to three months and runs in the opposite direction of the bullish primary trend, continues to remain weak in the absence of positive news from either the energy sector or the major oil-producing countries.
Near-term supports for WTI crude are placed at $61 per barrel, a close below which crude prices should drop to $58 per barrel, the bottom of the medium-term bearish channel, where prices are likely to find a bottom.
On the upside, crude prices should find resistances in the $66-67 per barrel range, and if prices manage to close above the resistances, which looks very unlikely at the moment, we could see oil prices targeting $74 per barrel, a jump of more than 10 percent on the upside following the breakout.
Crude-oil prices are still largely dependent on the production numbers from the OPEC members, although the US has recently overtaken Saudi Arabia to become the world’s second largest oil producer. According to a recent survey, OPEC pumped about 32.19 million barrels of crude oil per day in March of this year, the lowest in 11 months, on the back of a decline in output in Venezuela coupled with a fall in Angolan exports and outages in Libya. However, the fall in crude-oil output by OPEC members was well supported by US producers, with output rising to more than 47-year highs. In addition, Russia, a member of the OPEC, reported the largest crude-oil production numbers in March in almost a year.
Crude oil is in a long-term bullish trend, no doubt about it. But within the next couple of months, prices are likely to drop below $60 per barrel as markets digest the fallout of the US steel tariffs and the implications of further retaliation from countries most affected by the ongoing trade war—which many think was unnecessary, especially in the wake of a global economic upturn in the last few years—leading to a bearish trend reversal in global crude-oil markets.