WTI whipsawed on OPEC expectations and possible lower liquidity

WTI has been a choppy play in North American trade on Wednesday ahead of the OPEC meeting in Vienna tomorrow.

Oil glut Background

As a quick prelude to that, oil prices have fallen by almost a third since October to below $60 per barrel all because of the Saudis raising their production to compensate for a drop in Iranian oil exports due to fresh U.S. sanctions, which in turn, were not as harsh as first thought. Washington gave permissions waivers to some buyers of Iranian crude which only added to concerns of a surplus. Falling demand has also been an issue and with global growth forecasts recently downgraded, the price of oil has been plummeting to the bottom of the barrel. 

In recent trade, the markets have been jittery ahead of the OPEC and talks with allies such as Russia on Friday. The cartel's de facto leader, Saudi Arabia, has been calling for steep cuts in output from January.  However,  he has come under pressure from U.S. President Donald Trump to push oil prices even lower, and there is a political tie-in there which may force the hand of the Saudi's to comply with such requests, and thus the markets figure that the cartel's hands are tied.

The war in Yemen is a major geopolitical factor linked into the price of oil and should the Saudis proceed with a big cut, that will likely ruffle the feathers of their friends in Washington spur the Democrats in Congress to go more actively for the Nopec legislation. That will likely lead to the withdrawal of U.S. support for the Saudi-backed forces in the war in Yemen. However, Trump can't have it both ways.

Trump can't have it both ways

Trump's America first agenda had relied on a weaker dollar, low-interest rates and levels of inflation and a very gradual path of rate hikes for the Fed, if any at all. It would now appear that the Fed is closer to neutral than ever before, and therefore rates are unlikely to continue to rise much beyond that level of neutral or, perhaps even pause following an expected rate hike later this month with the potential of perhaps, depending on economic data, up to three rate hikes in 2019. In turn, the dollar is starting to lose its appeal as the market starts to discount rate hikes along the curve. 

As for the price action today, it has all been about what is expected from the OPEC meeting tomorrow and talks with Russia on Friday. Saudi Arabia had indicated it wanted the Organization of the Petroleum Exporting Countries and its allies to cut output by at least 1.3m bpd, or 1.3 percent of global production. Riyadh wants Moscow to contribute at least 250,000-300,000 bpd to the cut but Russia insists the amount should be only half of that, OPEC and non-OPEC sources said.

Recent news flows across the wires lead to a spike and a dip in the price of oil in recent trade. We had Oman's oil minister reported saying that all OPEC+ members appear to be on board for a cut which sent prices higher, although then reportedly saying in a follow up that OPEC could agree to just 1mbpd cut from Sept or Oct levels. That is not what markets were looking for and leaves the outlook a little fuzzy. 

Adding to the volatility is the fact that markets are somewhat thinner today. This was due to a holiday in remembrance of President George Herbert Walker Bush, who died Nov. 30 at the age of 94, who is being honoured in memory at a National Cathedral memorial service in Washington on Wednesday, which has been designated a national day of mourning by President Donald Trump. Commodities markets were operating per usual, but other U.S.-based risk markets were not, likely adding volatility in the remaining open markets. 

WTI technicals 

Bulls need to get back above the 23.6% Fibo retracement of the recent rout from just below the 77 handle at 56 with the confluence of the 21-D SMA a dollar below down at 55. Indicators are aligned bullish and we still have both daily & weekly RSI above 30 which still gives the bulls the upper hand at this point ahead of the OPEC meeting on Thursday. However, that monthly RSI and DMI remain bearish and on a wider perspective. ATR is also tracking a strong trend to the downside. To the downside, the 123.6% Fibo extension target comes in at the 43.90s while the June 2009 lows are nearby at 41.83. On the wide, the 161.18% Fibo extension target is situated at 33.77, and the Jan 2016 low is down at 26.03.