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  • OPEC+ cuts over the weekend have given markets some substance but were not enough to cater for Shale.
  • Divergence supports the case for correction of weekly bullish impulse. 

Prices of the OPEC+ cuts over the weekend have given markets some fat from the bone to chew on, but there has not been much in the way of a bid nor follow through since opening prices breached $40 per barrel in the Asian open.

Instead, prices have declined on the day, losing 2% at the time of writing having fallen from high of $40.42 to a low of $37.96. From a technical standpoint, there is scope for a bearish correction and continuation, but bears will need to pay close attention to how uninterrupted a global demand recovery can be at this juncture. 

COVID-19 was the death knell to an already oversupplied market place which came right at the time of a price war. The combination sent oil prices plummeting to zero. 

Consequently, we have seen OPEC+ this weekend again agreeing on a historic 9.6m bpd cut for another month in order to stabilise prices. This will be in place before production curtailments begin to slowly taper and it will enable the market to normalise alongside a demand recovery. 

However, markets are not satisfied that the cuts were enough.

The volatility explosion will keep positioning constrained for time being

Travel restrictions being lifted around the world and an increase in economic activity and are expected to result in higher consumption. 

While this agreement was broadly expected, it will help accelerate the Great Rebalancing as we expect the combination of market-driven declines, OPEC+ cuts and demand normalization will push the global crude market into a deep deficit this quarter and next,

analysts at TD Securities explained. 

On the other side to these positive fundamentals, however, the analysts at TD Securities remind that there are still going to be supply-side risks from the US shale patch. 

The key risk for energy markets, however, remains a resumption of production growth in the US shale patch, as prices sharply recover closer towards break-even levels, the analysts said. 

Not only are North American shale-oil producers a risk as prices of crude climb, a refusal by Mexico to adhere to production cuts as well as the report that Libya has restarted production at its largest oil field will help to keep a lid on prices.

The nation’s output has been deeply disrupted by the civil war over the past months, but the country’s largest field will slowly begin resuming production following a brokered deal between rival factions. It will take months for the field to return to full capacity, but Libya’s return will eventually bring more barrels on the market,

the analysts at TD Securities explained. 

A possibility of a second wave is a factor

While the OPEC cuts were not insignificant, there are plenty of bearish factors out there still. These are including the prospects of additional lockdowns as nations seek to open their economies up as full and as soon as possible.

For example, most Islamic countries had partly reopened for Ramadan, and we have seen second waves with the middle seats above its peak and Iran is back at all-time peaks.

The Saudis have announced that they will close one of their major cities. The mass demonstrations worldwide increase the risk as well. 

Meanwhile, there are questions over whether Gulf OPEC producers who have pledged voluntary production cuts of 1.18 million barrels per day that began in June, will make any plans to extend those reductions beyond this month. 

WTI levels

WTI has been boosted of late by fundamentals, but how long can the price action withstand an increasingly validated bearish technical landscape?

This was the question asked at the open overnight following the OPEC news in the following price analysis:

  • WTI Price Analysis: Bears looking to failure below 200-DMA

 

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