Oil prices have been flat for several days,

Friday, February 8, 2019

Oil prices have been flat for several days, weighed down by concerns about the health of the global economy, plus the potential return of supply from Libya. “Growing economic concerns, falling stock markets and emerging doubts that the trade conflict between the US and China will be resolved are putting oil prices under pressure,” Commerzbank wrote in a note on Friday.

Russia throws a lifeline to Venezuela. U.S. sanctions on Venezuela threaten to shut in a major portion of the country’s oil production. Not only do sanctions bar Venezuelan oil from flowing to the U.S., but crucially, it also prohibits U.S. diluents from heading to Venezuela. Without diluents, Venezuela cannot process its heavy crude and would be forced to shut down output. However, Russia’s Rosneft is reportedly sending some oil products to Venezuela to keep production from collapsing, according to the New York Times. As a result, Venezuela’s oil production may not utterly collapse, which could keep Maduro in power a little while longer. However, U.S. sanctions could still lead to mass starvation, exploding the already terrible humanitarian crisis.

Venezuelan oil stranded. More than 20 tankers loaded with 9.6 million barrels of oil from Venezuela are sitting idle in the U.S. Gulf Coast, according to Reuters, unable to make delivery because of sanctions. There are other cargoes sitting off the coast in Europe and in the Caribbean.

Trump rules out Xi meeting, raising trade concerns. President Trump said he would not meet Chinese President Xi Jingping before the March 1 trade deadline. A meeting of the two, experts suggest, would be an indication that the U.S. and China were close to reaching a sweeping trade deal. Trump has promised to hike tariffs on $200 billion worth of Chinese imports from 10 to 25 percent. White House economic advisor Larry Kudlow said that there is a “pretty sizable distance” to go on the trade talks. The Wall Street Journal reported that U.S. business titans are urging Trump to make a deal.

U.S. Congress considers “NOPEC” bill; oil companies warn against it. Legislation that would give the U.S. Justice Department authority to sue OPEC members over antitrust violations is progressing through the U.S. Congress. However, major international oil companies are lobbying against it, fearing blowback on their operations. The legislation has bipartisan support in the Congress, although it’s not clear where President Trump stands. “We are just a tweet away from Nopec becoming law,” Bob McNally at consultancy Rapidan Energy told the FT.

France backs Nord Stream 2 regulation. France threw its weight behind an EU proposal to regulate the Nord Stream 2 pipeline, potentially threatening its completion, according to Reuters. The move is a blow to Germany, which has backed the project. The proposal calls for extending internal energy market laws to include offshore gas pipelines. The move is also bad for Gazprom and its partners, which includes Germany’s Uniper and BASF’s (ETR: BASF) Wintershall unit, Royal Dutch Shell (NYSE: RDS.A), Austria’s OMV (VIE: OMV) and France’s Engie (EPA: ENGI).

ExxonMobil and Qatar greenlight $10 billion LNG project. ExxonMobil (NYSE: XOM) and Qatar Petroleum gave the final investment decision on a $10 billion LNG project on the coast of Texas. The Golden Pass LNG project will have a capacity of 16 mtpa and will come online in the early- to mid-2020s.

Exxon announces new Guyana discoveries. ExxonMobil (NYSE: XOM) continues to make new discoveries off the coast of Guyana. Exxon announced its 12th discovery this week.

Glut of frac sand. Frac sand prices are plummeting because of oversupply. West Texas sand could drop 19 percent this year to about $30 per ton, according to Bloomberg and Rystad Energy. New mines in Texas have opened up, adding supply at a time when demand is taking a hit. The losers could be mines in Wisconsin, which once dominated the business.

AMLO to announce Pemex support. The debt-laden Pemex could receive significant support from the Mexican state. President Andres Manuel Lopez Obrador said earlier this week that he would unveil a support package, although was vague on specifics. Pemex needs help in order to return to debt markets, which it likely needs to do in order to meet bond payments.

Goldman to slash commodities trading unit. Goldman Sachs (NYSE: GS) has plans to significantly curtail its commodities trading arm because it isn’t as profitable as it used to be.

Oil majors outsourcing exploration. In a sign of a changing business, some oil majors are outsourcing exploration to smaller firms. For the smaller companies, it allows them to save on costs while gaining a larger partner.

Suncor calls for early end to production cuts. Suncor (NYSE: SU) called on the Alberta government to put an early end to the mandatory production cuts.

Libyan National Army seizes Sharara field. The Libyan National Army (LNA), run by General Khalifa Haftar, have reportedly taken control of the country’s largest oil field, the Sharara. The 315,000-bpd field had been offline since December, leading to a significant decline in oil production. The seizure of the Sharara could lead to its reopening. Oil prices saw downward pressure on the news.

Total SA makes discovery in South Africa. Total SA (NYSE: TOT) announced a potentially significant oil discovery off the coast of South Africa, the country’s first. Total said that the Brulpadda field could hold 1 billion barrels of oil and gas reserves, although it is mostly gas condensate. “It is really transformational,’’ Andrew Latham, vice president of global exploration at consultant Wood MacKenzie Ltd., told Bloomberg. “This could be a discovery that kickstarts a bit of a gas strategy for South Africa.’’

GM going electric, but won’t make money for a while. GM (NYSE: GM) does not expect its electric vehicles to turn a profit for several more years, but it is pursuing an all-electric lineup over time.

Chevron to cut emissions to stave off shareholder resolutions. Chevron (NYSE: CVX) said that it would cut its greenhouse gas emissions to align with the Paris Climate accord, reducing air pollution by 25 to 30 percent by 2023. BP (NYSE: BP) is taking similar steps. The moves could also be viewed as a way of defusing growing shareholder unease. Shareholder activists have been pushing climate resolutions at annual meetings, with increasing success over time.
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Demand Concerns Drive Oil Markets
U.S. West Texas Intermediate oil futures are trading lower for the week, putting the market in a position to post a potentially bearish technical closing price reversal top on the weekly chart. This chart pattern typically leads to the start of a two to three week correction.

Demand Concerns Move to Forefront

Demand concerns are driving the price action this week. Although the OPEC-led production cuts remain supportive, they may not be enough to underpin prices if demand drop substantially.

Putting a lid on crude oil futures are renewed worries over U.S.-China trade relations. The growing concerns were fueled by comments on Thursday from a U.S. trade official who felt the two economic powerhouses were still far away from striking a trade deal despite recent optimistic remarks from the Trump administration, and a report that an upcoming meeting between U.S. President Trump and China’s President Xi Jinping would be pushed into March.

Traders are also responding to another downgrade of a major economic region as well as dovish remarks from the Reserve Bank of Australia.

In the U.S. on Thursday, the crude oil tumbled after White House economic advisor Larry Kudlow said that China and the U.S. were still far away on striking a trade deal. Later in the session, stock weakened further after CNBC reported that the Trump-Xi meeting before the March 2 deadline was “highly unlikely.”

Also contributing to this week’s sell-off are negative comments from the European Commission. The EC cut its forecasts for Euro Zone economic growth this year and next on expectations the bloc’s largest countries will be held back by global grade tensions and domestic challenges. The Commission said Euro Zone growth will slow to 1.3 percent this year from 1.9 percent in 2018, before rebounding in 2020 to 1.6 percent.

Early Friday, the Reserve Bank of Australia (RBA) may have telegraphed a rate cut for later in the year when it made a substantial downward to its growth forecasts in its quarterly Statement of Monetary Policy (SoMP). This also helped put a lid on crude oil prices.

Weekly Outlook

The outlook for lower demand is expected to continue to weigh on the crude oil market next week as the current theme in the market moving forward is concern over the slowing global economy. The news that Saudi Arabia reduced its output in January by about 400,000 barrels per day (bpd) to 10.24 million bpd is potentially bullish, but it is actually stale data. Traders are more concerned about demand at this time.

The may be some light at the end of the tunnel, however, for bullish traders. Some traders are saying that the Trump administration is not expected to renew waivers to sanctions against buying Iranian oil.

Crude traders will also be watching the price action in the stock market since it has been moving nearly lock-step with crude oil for several months. Stronger stocks will be supportive for prices, but another steep stock market decline will put pressure on crude prices.

Technical Analysis

This main trend is down according to the weekly swing chart. Despite the impressive six-week rally, we have to conclude that the move was likely fueled by a combination of aggressive short-covering and speculative buying. The main trend never turned up because “real” buyers never came into the market.

While most of the rally was fueled by optimism over the OPEC-led production cuts which began on January 1 and appear to be working to trim the global supply glut, this news only dealt with the supply side of the equation. Buyers were looking for a more positive outlook on demand, but that wouldn’t happen without a trade deal between the United States and China.

Renewed uncertainty over U.S.-China trade negotiations and a possible delay until early March has stripped speculative longs of their incentive to stay with the rally. This is driving this week’s profit-taking and position-squaring. More importantly, it is helping to form a potentially bearish closing price reversal top, which could trigger the start of a 2 to 3 week correction.

The main range is $76.29 to $42.67. Its 50% to 61.8% retracement zone at $59.48 to $63.45 was the primary upside target. However, this week’s price action indicates that unless traders are willing to buy strength, this target zone won’t be reached over the near-term.

The new short-term range is $42.67 to $55.75. Its retracement zone at $49.21 to $47.67 is the new downside target. The formation of the closing price reversal top is a bearish signal. It often triggers the start of a 2 to 3 week correction. Typically, the target is a 50% to 61.8% retracement zone.

A correction into $49.21 to $47.67 may be a necessary step in bottoming process. This is because this zone represents value. Because of this, expect to see buyers come in on a test of this zone. This buying may be enough to form a secondary higher bottom.

Essentially, the short-covering rally wasn’t strong enough to drive the market into the retracement zone at $59.48 to $63.45, but the selling pressure could be enough to drive crude oil into the value zone at $49.21 to $47.67. This is our downside target. Look for buyers on a pullback into this zone. If this move corresponds with positive developments over the U.S.-China trade deal then this could launch the next rally.

Fundamentally, traders will remain optimistic as long as OPEC and its allies continue to trim production. However, without demand, prices are likely to weaken over the near-term. Traders shouldn’t expect to see a sustained rally until the U.S.-China deal is completed.