Sixth Weekly Loss for Crude Accompanied by Signals of Deepening Bear Market

Friday November 16, 2018

Predictably given the pummeling crude prices have taken in recent weeks, oil experienced a minuscule rise on Friday but still fell for a sixth straight week, with expectations of the Organization of the Petroleum Exporting Countries (OPEC) cutting output next month providing not much support against the twin triggers of massive global production and weakening demand.

Brent settled up 14 cents at $66.76 per barrel but fell 4.6 percent in the week, the sixth consecutive decline; West Texas Intermediate settled unchanged at $56.46 per barrel, having fallen 5.6 percent in the week, also its sixth straight weekly decline.

With OPEC ministers meeting on December 6 in Vienna to decide on production policy for the next six months as crude inventories around the world steadily build, the question becomes, can the announcement of a cutback from the cartel produce a swift price rebound?

One analyst who believes the answer is yes is Harry Tchilinguirian, global head of commodity markets strategy at BNP Paribas: he said that if production falls further in Venezuela and Libya, and given "We are likely from December onward to have at least 1 million barrels per day [bpd] less of [Iranian] crude exports," he would not be surprised if Brent recovered to $80 this year.

Similarly, Chris Ralph, chief investment officer at St. James's Place Wealth Management, told Bloomberg television that supply will soon be cut to the point where prices will bottom out and then rebound.

But Rebecca Babin, senior energy trader at CIBC Private Wealth Management, echoed the sentiments of many other experts when she told Bloomberg television that with the huge volatility spikes experienced by crude of late, it's hard to determine "where the floor is; finding a floor is going to take more time: you can't just pick a day and say `here's the floor'."

Babin added that the biggest surprise among the confluence of factors contributing to the sudden bear market for crude was the U.S. issuing waivers to countries such as China and India so that they can continue to buy oil from Iran.

Louise Yamada, founder and manager at Technical Research Advisors, says data suggests a deeper plunge into bear territory: she told CNBC, "We've seen the completion of the target from a head and shoulders bottom back in 2015-2016: it went directly up to $78-$79 [per barrel].

"This has been a severe setback; we were looking for a weakness towards the trend, [and] it's actually broken the trend."

Yamada went on to note, "The weekly momentum has been declining for half the year, suggesting that the rally was weakening, and now we're at the point where the monthly is just kissing for a sell signal," and she added that $52 to $53 could act as a temporary support level for crude.

Presumably, prices at that level would be too low even for U.S. president Donald Trump, who has spent the better part of the year pressuring OPEC to produce more and lower prices from earlier highs of $80; this week the brash billionaire met with Russian president Vladimir Putin and discussed the issue, with the latter subsequently telling media that "where [the market] is now, where it was recently, anything around $70 suits us completely."

But he added that Moscow would continue cooperating with OPEC on global crude production levels.

Another question to consider is whether OPEC's proposal to slash output will be supported - and adhered to: ally Russia has repeatedly stated there is no need to downsize, and members Iraq and Nigeria have clearly stated their intention to boost production in 2019.