Is Oil about to Rollover?

The price of oil has risen more than 20% over the past month.  It is being driven by ideas that OPEC (and Russia) may implement a freeze or an output cut at the end of next month.  At the same time, US crude stocks trended lower.  

The market has discounted good news, but the news stream has turned.  Momentum players may still managed to lift prices to marginal new highs above last week $51.60 high basis the November light sweet crude contract, but the risk is that the larger move comes to the downside.  

The Slow Stochastics have already rolled over, and the MACDs are poised to cross lower in the coming days.  The RSI is elevated but is flat for the third session, warning that momentum is flagging.  

More importantly, the fundamental story is becoming more nuanced.  First, there is a growing dispute within OPEC about the current level of output.   The Secretariat in Vienna compiles its estimate from national reports and secondary sources.  Iran, Iraq and Venezuela object, complaining that their output is higher than the Secretariat reports.  Iran, for example, claims its output in September was 3.89 mln barrels a day, or 300k more than OPEC's official estimate. Iraq claims it is producing 320k barrels a day more than OPEC acknowledges.  Venezuela says that OPEC is excluding the heavy oil its produced in the Orinoco  Belt.  This would added around 245k barrels OPEC 's estimate.  

Second, Russia may not be a reliable partner for OPEC.  Russia has been expanding its output, and estimates suggest that here in October it is producing about 100k barrels a day more than last month.   A freeze would still leave it producing the most among of oil since the Soviet era.  

Third, US producers are increasing their drilling operations.  The oil rig count increased last week for the seventh consecutive week.  The rig count is the highest since February and has risen by 100 (to 432) since June.  US oil inventories had fallen for six weeks, but rose by almost five mln barrels last week.  For this time of year, inventories are at record levels.  

Initial support for the November contract is seen near $49.80.  It probably requires a break of the $49.15-$49.35 recently lows to convince others that a near-term top is in place.   From a medium-term perspective, the $46-48 band is important.  Our work has shown that for some currencies, including the Canadian dollar, the rate differential story is more important a driver than oil.  The Norwegian krone and Mexican peso also seem somewhat less sensitive to the vagaries of oil movement.  On the other hand, the Russian ruble has become more sensitive to oil pries recently, and the 60-day rolling correlation (on percentage change) is at its most extreme reading since June.

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