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Different geopolitical scenarios may define the Oil market

Oil Pump | EconAlerts

Fundamental Analysis:

Intro: Oil prices are seen to stabilise above $71 USD p/b and are somewhat reflecting the current situation of the global fundamental scene along with the US economic advancement. Oil trader’s phycology is overwhelmed with the below matters.

Venezuela: In our humble opinion, Venezuela is not to be regarded as the OPEC member to rely on in order to push the black gold supply for the time being. The oil producer in the Latin American country is undertaken by huge corruption and most countries do not recognise Venezuela’s new president. We do not see Venezuela adding to global oil supply as recent numbers have confirmed. Despite that, potential sanctions on Venezuela are supporting Oil prices keeping them strong as a fundamental part. Many other countries in and out of the OPEC can rush to cover the supply easily but remain cautious.

OPEC Supply: Several analysts and market participants share the opinion that OPEC could decide to increase oil output in coming June due to the pre-mentioned Venezuelan matter and worries over Iranian supply, especially after Washington raised concerns regarding the oil rally getting out of control. OPEC has said it’s currently unnecessary to ease output restrictions regardless of concerns among consuming nations that the price rally could undermine demand.

Hedging techniques: According to Goldman Sachs, Oil producers have started hedging against potential 2019 production surplus. The average price is set to $60 p/b regarding 2019 and $57 p/b regarding 2018. This indicates that a significant part of the market expects Oil producers to resume pumping at increased levels in the next year or even sooner. Oil producers use futures contracts to hedge their exposure to production. This is a strategic move taken in an effort to keep themselves protected from potential losses should the price of U.S. crude fall unexpectedly.

Iran: On another front, the Iran matter does not seem to be heading to an end any time soon. During the current week threats were fired from the US side and demands were made towards Iran in order to change its way of conduct. From the Oil industry perspective, Iran may find ways to continue to push the commodity around the world. This is our opinion and we base it on the fact that this is not the first time the US will enforce severe sanctions to the Middle East country. In the past, Iran was able to survive this treatment from the US perhaps by providing Oil to suppliers that are not listed or known. This Oil could be then distributed to its buyers under the name of the new supplier leaving Iran out of the picture. This could be a movie scenario, however, the money involved in the Oil industry is so significant that it is hard to believe otherwise and that Iran will stop its oil production and supply.

Conclusion: As a conclusion, we would like to analyse the scenario of the US accepting the nuclear deal and reasoning with Iran. Even though this is a far seen scenario with the current situation, we expect Oil prices to be affected significantly if a solution to the problem was to be reached. Iran would be enabled to export higher levels of Oil to the world and supply will logically reduce demand knocking prices down.

Technical Analysis:

Crude Oil is currently trading around $71.70 per barrel.

Despite possible corrections within the week, we could see the commodity’s prices land on higher grounds than currently as fundamental issues stated above are not expected to be resolved any time soon.

Technically we see strong support at $71.50 (S1) tested over 5 times since the 16th of May but has never been breached. Furthermore, we see strong resistance at $72.50 (R1) which was also tested several times but never breached. These to levels support the scenario of a sideways movement between them for the commodity.

The Crude Oil Inventory data to be released on Wednesday 17:30 (GMT +3) supports the case that Oil may move in a sideways movement with some bullish tones. This is due to the fact that a drawdown is expected of -1.6M barrels according to EIKON Reuters. The forecast was initially at -2.8M but was reduced to the current figure of -1.6M. If the forecast is to be realised then we could see Oil prices moving towards the $72.50 (R1) Resistance level and even breaching it heading to the $73.50 (R2) Resistance hurdle.

On the other hand, if the bears take over the market we may see Oil moving towards the $71.50 (S1) Support level and even breaching it aiming for the $70.50 (S2) Support level.

Please be advised that due to the fact the Oil is very sensitive to the fundamental news of the Middle East we may also see the scenario of a somewhat muted reaction to the Crude Oil Inventory release.


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This information is not considered as investment advice or investment recommendation but instead a marketing communication. This material has not been prepared in accordance with legal requirements designed to promote the independence of investment research, and that it is not subject to any prohibition on dealing ahead of the dissemination of investment research.

source: FXGiants

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