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Oil and Energy Sector Report

Crude Oil Analysis

Oil prices have had a bout of volatility lately. They rose faster this year than most people expected, but over the past week ran into some turbulence driven by OPEC+ disagreements.

OPEC+, the international oil cartel, has had some disagreements about how much to raise their collective oil output to address rebounding global demand and higher oil prices. In particular, some nations that invested more heavily in production feel that they should have their baseline levels adjusted higher. We will see how this will play out, but ultimately, OPEC+ is the only source of spare capacity at the moment.

Producers in Europe and North America are under ESG pressure, as well as pressure by shareholders to focus on dividends and buybacks rather than growth capex. During the 2010s decade, many shale producers focused on unprofitable growth, and investors and lenders are tired of that. As a result, US oil production is still nearly 2 million barrels per day below its pre-pandemic peak production rate, and that is helping to firm the price.

oil production

Chart Source: EIA

If OPEC+ has a major disagreement and they start unilaterally maxing out their production capacity, it would put significant downward pressure on the oil price for the remainder of this year. I remain long-term bullish on oil and gas, but over the next 6-12 months, the price will mainly be based on 1) decisions by OPEC+ that affect supply and 2) any virus variants and government shutdowns that affect demand.

For that reason, I prefer to emphasise the low-cost producers with strong balance sheets and some of the best-capitalized midstream businesses that mainly focus on transporting it. Buying oil futures in the 2024/2025 range also is appealing at this time.

But let’s dive into the short-term fundamentals of Oil. 

The Oil market had performed its strongest single-day selloff in months, on Monday the 19th of July, leaving investors stunned with its price action. 

The Oil market’s recovery, which has been steady in the current year so far, may need to be reexamined at this point as a change in fundamentals may have prevailed. 

On Monday, multiple media sources confirmed virus cases being on the rise worldwide, with the variant being in the epicentre of attention. U.S. cases of COVID-19 were up 70% over the previous week, according to Reuters, while some countries like Australia have even imposed new lockdown measures in various locations.

 Investors’ fears may have been intensified over a further economic slowdown, possibly presenting itself as a consequence in the near future. Of course, the main worry connected to the Oil market is that fuel demand could be reduced as the virus continues to spread and movement is reduced. 

WTI and Brent Oil lost very notable ground on Monday on traders concerns, while we must note that it is not clear yet to what extent the impact on Oil demand could be felt. Furthermore and in addition to the concerns over the virus, developments on the OPEC+ front that took place during the previous weekend may have also swayed investors in making rational decisions and even doubled the effect on Oil prices. 

OPEC majors like Saudi Arabia and Russia agreed to a request from the United Arab Emirates (UAE) to uplift Oil production. Initially, a disagreement had manifested over the matter, but according to Reuters, OPEC+ agreed on new output quotas for several members from May 2022, including the UAE, Saudi Arabia, Russia, Kuwait and Iraq. 

The compromise deal should unlock more crude barrels to a considerably tight oil market. Yet very imposing was the Oil market’s reaction on Wednesday the 21st of July that rebounded higher and regained most of the ground lost under the circumstances mentioned before in the previous days. 

We note that Oil demand is constant and possibly on the rise despite the uncertainty created by the virus spread. 

Oil prices also rose despite the weekly Oil market indicators displaying figures not warranting for such a move to take place. In the past days, the API released a surplus of +0.8M barrels going against expectations for a considerable drawdown. Adding to that, the EIA indicated a surplus of +2.1M barrels instead of a drawdown expected. 

In this case, both indicators should have sent Oil prices considerably lower as the number of barrels seems to be in excess, accounting for the previous week ending 16th of July. Yet contradicting the previous reading, the Baker Hughes Oil rig count figure rose to 380, adding 2 more active Oil rigs compared to the previous week.

 Finally, as a side note, the Financial Times stated that Saudi Aramco, the world’s largest oil producer, was dealing with a cyber extortionist in the past days as some of its company files had been leaked via a contractor. The cyber extortionist claimed to have seized the data last month and demanded a $50m ransom from the company.

Technically, we’re at the end of the bullish one-year wave cycle. The prediction was decline to 65.50 for the first corrective daily wave-A followed by 2nd corrective bullish wave-B. Now the question is if the market is going to sell-off once again for the wave-C?

A short-term sell signal will be if the price breaks below 69.75 level of support with targets of $65, $60 a barrel and potentially $58 next. 

As I said, this year will be volatile and great for short-term swing trading. Long-term, I am still on the side of the bulls. 

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