Chart Of The Day: Oil Bulls Benefit From Dual Market Dynamics

 | Jul 05, 2018 10:01

The current oil slump represents a buying opportunity, from both a fundamental and technical standpoint. While US President Donald Trump’s hawkish rhetoric may have short-term effects on the oil market, the broader supply-demand fundamentals continue to prevail. Technically, the selloff fits a trading pattern That could prove exceptionally bullish.

Fears of shrinking global supply were offset by signals from Saudi Arabia of a boost in production, sending the price of WTI lower for a second day on Thursday.

The selloff comes after crude oil hit a nearly three year high on Wednesday, of $75, after it jumped by 17% over the course of nine trading sessions. It was spurred by Trump tweeting:

The OPEC Monopoly must remember that gas prices are up & they are doing little to help. If anything, they are driving prices higher as the United States defends many of their members for very little $s. This must be a two-way street. REDUCE PRICING NOW!

With a tough mid-term election looming in November, it's essential to Republicans that crude remains below $75 a barrel.

But do OPEC producers really have the power to reduce prices at this point? Bart Melek, head of global commodity strategy at Toronto's TD Securities, thinks not. "Even if Saudi Arabia does provide much of the oil to replace any shortcomings from Iran or Libya or Venezuela, that has the market concerned that we will be hitting fairly low levels of spare capacity," he told Bloomberg.

Tamas Varga, an analyst at London's PVM Oil Associates Ltd, said:

"Bulls are regaining control. It looks as though any additional supply increase from Gulf producers and Russia will not be able to replace lost barrels from Libya, Iran, and Venezuela."

The American Petroleum Institute (API) reported on Tuesday that US oil stocks dropped by 4.5 million barrels in the week ending June 29—the key driver of WTI's near-three-year spike on that same day, before Trump's latest tweet pushed prices lower again.

And the Energy Information Administration (EIA) is expected to report that US inventories fell by another 5.2 million barrels during the same week, which would officially ratify a seventh straight weekly decline.

There are two concurrent dynamics driving oil prices higher at present: multiple production glitches are squeezing global supply, just as international demand is rising. Indeed, Morgan Stanley stepped up its outlook for Brent crude prices to $85 a barrel next year, even after the dampening effect of Trump's tweets.

Can the "Trump Effect" overcome the double-whammy of falling global supply and rising demand? We don't believe it can, nor do the commodity's technicals.